The Post SEO Stock Under-Performance: Market Sentiment, Earnings Management, and Over-Investment

We examine whether a post-SEO stock performance over the three years is related to market sentiment when an SEO is conducted, earnings management that a firm manipulates discretionary accruals and announces optimistic management forecasts, and over-investment after the SEO. In our results, managers seem to exploit the high market sentiment. They boost their earnings by increasing discretionary accruals and hype up the manipulated earnings with management forecasts. Therefore, we can say that the SEOs in the high sentiment period appear to be planned based on managerial opportunism. The over-investment conducted by the managers with managerial opportunism leads to the poor stock performance over the three years after the SEOs. Although investors do not quickly adjust their over optimism due to the high market sentiment, the gradually deteriorated performance caused by the over-investment makes them depreciate the firm value gradually.