Earnings management and the long-run underperformance of firms following convertible bond offers

De Wai Chou, C. Edward Wang, Sheng Syan Chen, Sandra Tsai

Research output: Contribution to journalArticle

12 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)73-98
Number of pages26
JournalJournal of Business Finance and Accounting
Volume36
Issue number1-2
DOIs
Publication statusPublished - 2009 Jan 1
Externally publishedYes

Keywords

  • Accounting accruals
  • Convertibles bond
  • Earnings management
  • Long-run performance

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting (miscellaneous)
  • Finance

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