Analyzing Cohen and Zarowin 2010
MEMORANDUM
TO: Equity and Debt Investors
FROM: Alexander Eaton
DATE: September 4, 2014
SUBJECT: Cohen & Zarowin 2010 Analysis
The purpose of this memo is to analyze and explain the findings of Cohen and Zarowin 2010. Cohen and Zarowin 2010 is an academic research paper that looked into the difference between real activities and accrual management post-seasoned equity offering performance. It mainly addresses the severity of engaging in manipulations in each of those management activities. This memo will first cover the main question and importance of the research. Then, it will discuss what accrual based and real earnings management are. Next, it will discuss what the two types of earnings management are and the key difference between the two. Next, it will discuss the main findings of the paper. At the end it will discuss whether this information would be useful to debt or equity investors.
The main research question that was being answered was whether, and how, firms engage in real earnings management around SEOs and how real and accrual-based earnings management interact around these important corporate events. This is interesting and important because this area has been receiving increasing interest, yet this particular research has never been done. It will answer a question that will affect many companies.
Equity and Debt Investors
September 4, 2014
Page 2
This paper defines accrual-based management as firms managing their earnings upward around SEOs. This misleads the stock market because it seems like earnings are higher than they are. Real earnings management is when a firm manipulates it’s real activities, such as reducing R&D costs or delaying a project in order to keep earnings higher. The key difference between the two is that real earnings management is manipulating its actual cash flows, and accrual based creates an illusion of cash flows.
They measure each type of earnings management in different ways. To measure accrual-based
TO: Equity and Debt Investors
FROM: Alexander Eaton
DATE: September 4, 2014
SUBJECT: Cohen & Zarowin 2010 Analysis
The purpose of this memo is to analyze and explain the findings of Cohen and Zarowin 2010. Cohen and Zarowin 2010 is an academic research paper that looked into the difference between real activities and accrual management post-seasoned equity offering performance. It mainly addresses the severity of engaging in manipulations in each of those management activities. This memo will first cover the main question and importance of the research. Then, it will discuss what accrual based and real earnings management are. Next, it will discuss what the two types of earnings management are and the key difference between the two. Next, it will discuss the main findings of the paper. At the end it will discuss whether this information would be useful to debt or equity investors.
The main research question that was being answered was whether, and how, firms engage in real earnings management around SEOs and how real and accrual-based earnings management interact around these important corporate events. This is interesting and important because this area has been receiving increasing interest, yet this particular research has never been done. It will answer a question that will affect many companies.
Equity and Debt Investors
September 4, 2014
Page 2
This paper defines accrual-based management as firms managing their earnings upward around SEOs. This misleads the stock market because it seems like earnings are higher than they are. Real earnings management is when a firm manipulates it’s real activities, such as reducing R&D costs or delaying a project in order to keep earnings higher. The key difference between the two is that real earnings management is manipulating its actual cash flows, and accrual based creates an illusion of cash flows.
They measure each type of earnings management in different ways. To measure accrual-based