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

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

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.

Suggested Citation

  • De‐Wai Chou & C. Edward Wang & Sheng‐Syan Chen & Sandra Tsai, 2009. "Earnings Management and the Long‐Run Underperformance of Firms Following Convertible Bond Offers," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(1‐2), pages 73-98, January.
    • Handle: RePEc:bla:jbfnac:v:36:y:2009:i:1-2:p:73-98
    DOI: 10.1111/j.1468-5957.2008.02120.x
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    References listed on IDEAS

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    6. Yusnidah Ibrahim & Md Mohan Uddin & Kamarun Nisham Taufil Mohd & Mohd Sobri Minai, 2013. "Agency Costs and the Long-Run Performance of Debt Issuers," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 9(1), pages 67-87.

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