Real Earnings Management, Liquidity Risk and REITs SEO Dynamics
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We analyze how REITs managers use real earnin gs management to address issues of liquidity risk and increased cost of capital they face during seasoned equity offerings. We show that REITs managers engage in real earnings management instead of accrual earnings management to attract more uninformed trading in order to provide the liquidity service at a lower cost during seasoned equity offerings. We find REITs with higher liquidity risk are more likely to manipulate earnings prior to equity offerings and uninformed trading is higher following real earnings management. Firms set the offer price at a smaller discount after engaging in real earnings management and stock returns decline in the long run. The findings are consistent with real option and liquidity risk explanations for equity offerings.
KeywordsReal estate investment trust Seasoned equity offerings Liquidity risk Real earnings management
JEL ClassificationG14 G23 G32 M41
The paper has been presented at FMA Annual Meeting 2013 (Chicago, IL), 6th IREBS Conference on Real Estate Economics and Finance 2013, AREUEA-ASSA 2014 and Asia Pacific Real Estate Research Symposium 2014. We thank conference participants and referees for valuable comments. As this paper is built on a part of Xiaoying’s PhD thesis, she specially thanks the thesis committee members and examiners: Yongheng Deng, Brent Ambrose, and Masaki Mori for the valuable feedback. Xiaoying Deng acknowledges the financial support of the National Science Foundation of China (71703095) and the Fundamental Research Funds for the Central Universities.
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