Convertible Debt Issuance and Earnings Management: Evidence from Japanese Issuers

摘要

The study examines whether Japanese firms manipulate the reported earnings around the time of issuance of convertible debt and the impact of earnings management on the firms' long-run post-issue stock performance. We find that managers of the issuers engaged in income-increasing earnings management around issuance of convertible debt. We propose that earnings management serves as a likely source of investor over-optimism at the time of issuance. The empirical evidence suggests that the income-increasing accounting accruals made at the time of convertible debt issuance predict the long-run post-issue stock underperformance. In contrast to research on U.S. convertible debt issues that finds that U.S. issuers tend to manipulate earnings in the year prior to the issuance, during the issue year, and in the year after, we find that Japanese managers manipulated earnings only in the issue year. The study contributes to the large body of literature on earnings manipulation around the time of securities issuance.