A Study on Earnings Management Behavior During the Follow-on Offering Period of Publicly Offered REITs

As a special form of equity refinancing, follow-on offerings of domestic publicly offered REITs have an institutional background distinct from that of ordinary listed companies, thereby giving rise to unique earnings management risks. Based on agency theory, managerial overoptimism theory and earnings management theory, this study compares differences in institutional conditions and practices of earnings management between U.S. and Asian REITs, and identifies two earnings management pathways during the follow-on offering stage of domestic publicly offered REITs: real-activity earnings management through adjustments to the distributable amount of existing assets, and broad-sense earnings expectation management characterized by optimistic bias in valuation forecasts for assets to be acquired. This study conducts an exploratory case study based on publicly disclosed documents and finds that to date Chinese regulators have not imposed any penalties for illegal earnings management occurring in the follow-on offering stage. Nevertheless, some projects exhibit indicative signs, such as abnormal cash flow fluctuations during the window period and overly optimistic valuation assumptions. To address hidden risks of window dressing during the follow-on offering process, countermeasures can be refined from three perspectives: strengthening constraints on valuation forecasts, optimizing REIT fund manager incentive mechanisms, and enhancing investors’ risk identification capabilities.