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Earnings management and convertible preferred stock calls

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  • Omar, Ayishat
  • Tang, Alex P.

Abstract

The impact of convertible calls on stock returns and operating performance has intrigued researchers for many years. Many studies have examined this issue, but the evidence is not conclusive. In this study, we provide a comprehensive review of the literature and examine earnings management around calls of convertible preferred stock. We find that pre-call abnormal accruals are significantly positive. Coupled with the well-documented significantly positive abnormal stock returns during the pre-call period, this evidence raises the question of whether earnings are managed upward to boost stock prices and ensure conversion of called securities. However, our overall findings do not support the argument that high accruals in the pre-call period reflect deliberate earnings management to entice investors to convert their securities into equity ahead of subsequent poor performance.

Suggested Citation

  • Omar, Ayishat & Tang, Alex P., 2019. "Earnings management and convertible preferred stock calls," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 423-433.
    • Handle: RePEc:eee:reveco:v:63:y:2019:i:c:p:423-433
    DOI: 10.1016/j.iref.2019.05.005
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    References listed on IDEAS

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    1. Cheng, Minying & Liu, Jun & Zhang, Longwen, 2020. "Tunneling through allies: Affiliated shareholders, insider trading, and monitoring failure," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 323-345.

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    More about this item

    Keywords

    Convertible security calls; Convertible preferred stock; Stock returns; Operating performance; Earnings management;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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