Earnings management occurs when managers use judgment in financial reporting and in structural transactions to alter financial reports either to mislead some stakeholders about the underlying performance of the company, or to influence contractual outcomes that depend on reported financial performance. Many research studies have been conducted to investigate the earnings management in developed economies. Due to the regulated operating environment in India until 1992, earnings management was not a fertile topic for research. But, post-1992, companies are given freedom to price their capital issues. This freedom motivates the issuers to manage their earnings prior to capital issues. The objective of the study is to investigate if firms in India manage earnings prior to their launching of equity rights issues. The study uses Discretionary Current Accruals (DCAs) to measure the extent of earnings management. Modified Jones Model is used to estimate the adjusted DCAs during the three years prior to the rights issue (pre-issue period) and three years after the rights issue (post-issue period). The DCAs of rights issuing firms are adjusted for DCAs of control sample (non-rights issuers). Adjusted mean DCAs of pre-issue period is compared with adjusted mean DCAs of the post-issue period to detect the earnings management. The results suggest that there has been earnings management prior to the rights issues. The study period is from 1993-94 to 2003-04, and the sample size is 259.

Corporate earnings management is one of the most frequently investigated issues in the financial management and accounting disciplines. Earnings management has been widely used in many corporate issues for explaining the impact on management's motivations to manipulate reported earnings. According to Healy and Wahlen (1999), earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports either to mislead some stakeholders about the underlying economic performance of the company, or to influence contractual outcomes that depend on reported accounting numbers. They classify the motivation of earnings management into three categories: (a) capital market expectations and valuation, (b) contracts that are written in terms of accounting numbers, and (c) antitrust or other government regulation. Based on the three motivations, earnings management has been the incentive to react on the impact of corporate events such as initial public offerings (Aharony et al., 1993; and Teoh et al., 1998); seasoned equity offerings (Rangan, 1998; and Teoh et al., 1998), management buyouts (DeAngelo, 1986; Perry and Williams, 1994; and Wu, 1997), takeovers (Christie and Zimmerman, 1994). Earnings management in the capital offering process is of particular concern because of the extent of information asymmetry between the owners-managers and investors (Leland and Pyle, 1977), and between informed and uninformed investors (Beatty and Ritter, 1986). The information asymmetry between the management and related parties creates an opportunity for the management to engage in earnings management.

The process, pricing and stock market response to seasoned offerings of capital, and their long-term operating performance have been analyzed by several studies for corporate sector worldwide. Studies on the financial performance of Seasoned Equity Offerings (SEOs) of the US companies suggest that SEO firms outperform in the pre-offer period and underperforms post-offer. An analysis of stock market performance reveals that offering firms outperform the market before the issue, but that the market responds negatively to the SEO announcement and returns continue to underperform the market in the long run. To explain these facts, Rangan (1998) and Teoh et al. (1998) suggest that companies overstate their earnings before an SEO using income-increasing accounting accruals.

Earnings management, Discretionary Current Accruals, DCAs, Financial management, Seasoned Equity Offerings, SEOs, Generally Accepted Accounting Principles, GAAP, Initial Public Offering, IPO, Monitoring Indian Economy, Non-Discretionary Long-Term Accruals, NDLTAC.