Financial Statement Comparability and Valuation of Seasoned Equity Offerings

• In Event: Reporting Quality and Corporate Finance

Abstract

This study examines the relationship between financial statement comparability and the valuation of seasoned equity offerings (SEOs). We argue that financial statement comparability allows underwriters and investors to better assess the quality of the firms that tap into the season equity market through better comparison with the peer firms, thus reducing price protection on the part of the underwriter and manipulation of investor perceptions about the true underlying value of the firm’s equity securities on the part of the firm. As a result, we find that that SEO firms with better comparability experience less underpricing at the time of seasoned equity offering. We also find that SEO firms with better comparability are less likely to have positive earnings surprises and to issue overvalued equity. Furthermore, we find that better financial statement comparability mitigates management’s ability to sell overvalued equity especially for SEO firms with positive earnings surprises and relatively high real earnings management. Findings in this paper provide the empirical evidence to support the decision usefulness of financial statement comparability.

Authors

• Philip B Shane, The College of William & Mary

• David B Smith, University of Nebraska–Lincoln

• Suning Zhang, George Mason University