Earnings Smoothing and the Underpricing of Seasoned Equity Offerings (SEOs)

We argue that high quality firms that expect larger quantity of cash flows in the near future are more likely to actively smooth earnings via discretionary accruals before seasonal equity offerings to reduce underpricing. If high quality firms are confident about future earnings, it is also plausible to assume that they also push their offer prices up more aggressively, and lessen the degree of SEO underpricing. This paper presents empirical evidence that smooth performance is negatively related to the under pricing of seasonings equity offerings. We also document that smooth earnings resulting from discretionary accruals improve earnings informativeness. Our results are consistent with risk management and signaling theories and suggest that managers' efforts to produce smooth earning reports may add value to their firms by reducing SEO underpricing and improving earnings informativeness. * Ph.D. candidate at the University of Texas at El Paso ** Charles R. and Dorothy S. Carter Chair in Business Administration and Professor of Finance at the University of Texas at El Paso We wish to thank participants during a seminar presentation at the University of Texas at El Paso in November, 2010 for their helpful comments.