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Earnings Management and the Long‐Run Underperformance of Firms Following Convertible Bond Offers
Author(s) -
Chou DeWai,
Wang C. Edward,
Chen ShengSyan,
Tsai Sandra
Publication year - 2009
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2008.02120.x
Subject(s) - convertible bond , accrual , initial public offering , earnings management , issuer , earnings per share , business , equity (law) , earnings , convertible arbitrage , valuation (finance) , stock (firearms) , monetary economics , bond , share price , economics , accounting , finance , stock exchange , mechanical engineering , capital asset pricing model , arbitrage pricing theory , political science , risk arbitrage , law , engineering
This paper examines whether the long‐run underperformance of convertible bond issuers can be explained by earnings management, as reflected in discretionary current accruals around the time of the offer. Consistent with the earnings management hypothesis, we find that convertible issuers who adjust their discretionary current accruals to report higher net income in the issue year will generally experience inferior operating and stock return performance over the five‐year post‐issue period. Our findings indicate that there is some temporary overvaluation of convertible issuers by the stock market, but that the resultant disappointed investors will subsequently correct their valuation errors. The similarity of our results to those reported within the prior literature on initial public offers (IPOs) and seasoned equity offers (SEOs) suggests that the earnings management hypothesis is not unique to stock offers, but that it actually extends to convertible bond offers.