During equity issuances managers tend to inflate earnings and capitalize to increase stock price. While previous literature identified an ‘accrual anomaly’ as a source of potential mispricing and suggested its disappearance over time, we demonstrate that this anomaly has not fully vanished but rather shifted to other areas of the income statement. Specifically, managers now inflate earnings through non-investment accruals to capitalize during equity issuances. Using a comprehensive sample of corporate seasoned equity offerings (SEOs) from 1973 to 2018, we find that firms exploiting non-investment accruals to inflate pre-issue earnings experience lower stock returns in the year following the SEO. This evidence is consistent with potential mispricing at the time of issuance, followed by downward stock adjustments as investors recognize the divergence between reported earnings and fundamentals. Our research reveals that managers are more aggressive in pre-issue inflation of non-investment accruals when their firms heavily depend on equity financing. Our analyses indicate that SEO firms most aggressively inflating non-investment accruals underperform by 12% in stock returns during the post-issue year compared to firms not engaging in such practices.
