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

Authors

  • De-Wai Chou,

    1. The authors are respectively from the Department of Finance, Yuan Ze University, Taiwan; the Department of Business Administration, National Taipei University, Taiwan; the Department of Finance, National Taiwan University, Taiwan; and the Department of Finance, National Chung Cheng University, Taiwan. They thank Peter F. Pope (editor) and two anonymous referees for helpful comments on earlier drafts. This paper has also benefited from comments by seminar participants at the National Chengchi University and National Central University in Taiwan.
    Search for more papers by this author
  • C. Edward Wang,

    1. The authors are respectively from the Department of Finance, Yuan Ze University, Taiwan; the Department of Business Administration, National Taipei University, Taiwan; the Department of Finance, National Taiwan University, Taiwan; and the Department of Finance, National Chung Cheng University, Taiwan. They thank Peter F. Pope (editor) and two anonymous referees for helpful comments on earlier drafts. This paper has also benefited from comments by seminar participants at the National Chengchi University and National Central University in Taiwan.
    Search for more papers by this author
  • Sheng-Syan Chen,

    1. The authors are respectively from the Department of Finance, Yuan Ze University, Taiwan; the Department of Business Administration, National Taipei University, Taiwan; the Department of Finance, National Taiwan University, Taiwan; and the Department of Finance, National Chung Cheng University, Taiwan. They thank Peter F. Pope (editor) and two anonymous referees for helpful comments on earlier drafts. This paper has also benefited from comments by seminar participants at the National Chengchi University and National Central University in Taiwan.
    Search for more papers by this author
  • Sandra Tsai

    1. The authors are respectively from the Department of Finance, Yuan Ze University, Taiwan; the Department of Business Administration, National Taipei University, Taiwan; the Department of Finance, National Taiwan University, Taiwan; and the Department of Finance, National Chung Cheng University, Taiwan. They thank Peter F. Pope (editor) and two anonymous referees for helpful comments on earlier drafts. This paper has also benefited from comments by seminar participants at the National Chengchi University and National Central University in Taiwan.
    Search for more papers by this author

Address for correspondence: De-Wai Chou, Department of Finance, Yuan Ze University, Taiwan.
e-mail: dwchou@saturn.yzu.edu.tw

Abstract

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.

Ancillary