Purpose This paper investigates how media coverage affects the quality of accouning information for seasoned equity offering (SEO) firms. Design/methodology/approach The sample includes SEOs completed between January 1993 and December 2014 in the United States that are available from Thomson Financial’s Securities Data Company (SDC). The FactSet database was used to measure the amount of media coverage. The paper considers two types of earnings management: accrual-based earnings management and real earnings management. Findings This study finds that the media serves as a watchdog for real earnings management, but does not affect accrual manipulations. These findings hold when endogenous factors affecting firms’ earnings management choices are controlled for, and also when alternative time windows for media coverage are examined. Originality/value This paper is the first to demonstrate that media attention affects the quality of accounting information during equity offerings, as it successfully reduces real earnings management.

Introduction

Does media coverage influence firms’ decisions to engage in earnings management? A voluminous literature documents the importance of financial media in disseminating information to market participants and affecting firms’ financial performance (e.g., Fang and Peress, 2009; Engelberg and Parsons, 2011). Although equally important, the media’s effect on firms’ operational performance is less studied. By exerting pressure for particular managerial decisions, the media can influence firms’ investment in R&D and their quality of innovation (Hirshleifer et al., 2012),stock option grants to CEOs (Kuhnen and Niessen, 2012), and firms’ corporate social responsibility strategies (Zyglidopoulos et al., 2012). This paper examines the seasoned equity offering (SEO) setting to investigate the effect of the media on a key aspect of firms’ operational decision-making: earnings management. The study finds that higher media coverage before the offering corresponds to substantially lower real earnings management (REM) around the offering, but has no significant effect on accrual-based earnings management. This paper’s focus on earnings management is motivated by two factors: the importance of earnings management to a firm’s performance and the responsiveness of earnings management to managerial incentives. On the one hand, a large literature documents the impact of earnings management on shareholder value (e.g., Loomis, 1999), innovation (e.g., Fedyk and Khimich, 2016), and future performance (e.g., Rangan, 1998; Teoh et al., 1998). On the other hand, earnings management is one of the managerial decisions most susceptible to pressure from incentives—for example, managers manage earnings to reach bonus benchmarks or to increase the value of stock option holdings (Healy, 1985), and managers tailor activities management to the most value-relevant areas (Fedyk et al., 2016). These two features make earnings management an ideal domain for observing the effect of the media on managerial decisionmaking within firms. Conceptually, media coverage can affect a firm’s incentives for earnings management through two channels. The first channel is the media’s role as a watchdog, highlighted by Miller (2006), Kuhnen and Niessen (2012), and Dai et al. (2015). The key prediction of the watchdog channel (watchdog hypothesis) is a negative correlation between the volume of preexisting media coverage and the extent of earnings management. The second channel is the possibility that the greater visibility induced by higher media coverage can create incentives to report stronger earnings (Dyck and Zingales, 2002; Schrand and Zechman, 2012; Hribar and Yang, 2016). This channel (attention pressure hypothesis) predicts a positive correlation between a firm’s preexisting media coverage and its earnings management.