Largest Shareholder Ownership and Downward Real-activity Earnings Management in Korean Seasoned Equity Offerings Firms

We investigate whether firms’ real-activity earnings management (REM) around seasoned equity offerings (SEOs) and stock return performance after SEOs are different for the largest shareholders’ participation in SEOs. Using Korean firms, we find that an increase in the largest shareholders’ ownership is negatively related to REM in the quarters preceding an SEO. Additionally, positive market responses to SEO with the largest shareholders’ ownership increases are mitigated by the level of REM. We conclude that firms manage earnings in favor of the largest shareholders rather than other existing shareholders.