Earnings Management in Denmark around Seasoned Equity Offerings

Jonas Galsgaard Hansen & Magnus Grønbæk Jensen

Student thesis: Master thesis


A prevailing consensus among accounting researchers is that publicly traded companies around the world use earnings management practices when preparing financial statements. Numerous studies have documented evidence that seasoned equity offerings (“SEO”) provide a strong incentive to engage in earnings management activities (e.g. Rangan, 1998; Cohen & Zarowin, 2010; Eilifsen & Knivsflå, 2021). Inspired by previous studies, this thesis aims to examine the use of earnings management before SEOs in a Danish context. The thesis investigates a sample of 79 Danish publicly listed companies in the period between 2012-2021. With inspiration from the research design used in adjacent studies, the thesis tests the hypothesis that earnings management activities show in the financial reports one quarter before the SEO. Moreover, the thesis investigates whether the use of earnings management is more prevalent when the size of the offering increases. The thesis first introduces a review of existing literature structured around the presentation of the three common methods of conducting earnings management: Accrual Earnings Management (“AEM”), Real Earnings Management (“REM”), and Opportunistic Classification Shifting of Core Expenses to Special Items (“CS”). The models by Collins, Pungaliya, & Vijh (2017), Srivastava (2019), and Fan, Barua, Cready, & Thomas (2010) are argued to be the most suited for measuring the three types of earnings management in a quarterly setting. The thesis presents findings supported by strong statistical significance and robustness to fixed effects models. The results suggest that Danish companies, in general, have used earnings management in the pursuit of achieving a more successful outcome of SEOs. Further, the thesis presents proof that earnings management conduct is more widespread the larger the size of the SEO is. Specifically, the findings show that only AEM and CS have been applied to manipulate earnings, whereas the use of REM has not been proven. The thesis contributes with findings that call for greater attention to the subject from the perspective of stakeholders. In that regard, it is suggested that further research must be conducted to gain a deeper understanding of the consequences of earnings management before SEOs

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2022
Number of pages140