Earnings Management and the Long-Run Underperformance of Firms Following Convertible Bond Offers

http://ehis.ebscohost.com.libproxy.smu.edu.sg/ehost/pdfviewer/pdfviewer?sid=a9368f8b-8890-4251-b069-0ed40f37d508%40sessionmgr115&vid=0&hid=117

Earnings Management and the Long-Run Underperformance of Firms Following Convertible Bond Offers.

Chou, De-Wai1 Wang, C. Edward1 Chen, Sheng-Syan1 Tsai, Sandra1

Journal of Business Finance & Accounting. Jan/Feb2009, Vol. 36 Issue 1/2, p73-98. 26p. 9 Charts.

Abstract:

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.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s