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Earnings management and the performance of seasoned private equity placements: Evidence from Japanese issuers

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  • Daoping (Steven) He
  • David C. Yang
  • Liming Guan
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    Abstract

    Purpose – The purpose of this paper is to examine whether Japanese private placement issuers manipulate their earnings around the time of issuance and the relationship between earnings management and the post-issue stock underperformance. Design/methodology/approach – Cross-sectional modified Jones model is used to measure earnings management proxy – discretionary accruals. Control firms are developed to mitigate the impact of other factors on the measurement of earnings management. Different set of control firms is also developed to calculate abnormal stock returns. Findings – It is found that managers of Japanese private placement issuers tend to engage in income-increasing earnings management around the time of the issuance. It is further speculated that earnings management serves as a likely source of investor overoptimism at the time of private placements. To support this speculation, evidence is found suggesting that the income-increasing accounting accruals made at the time of private placements predict the post-issue long-term stock underperformance. Originality/value – The study contributes to the large body of literature on earnings manipulation around the time of securities issuance.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Managerial Auditing Journal.

    Volume (Year): 25 (2010)
    Issue (Month): 6 (July)
    Pages: 569-590

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    Handle: RePEc:eme:majpps:v:25:y:2010:i:6:p:569-590

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    Related research

    Keywords: Earnings; Financial reporting; Japan; Stock markets; Stock returns;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Wu, YiLin, 2004. "The choice of equity-selling mechanisms," Journal of Financial Economics, Elsevier, vol. 74(1), pages 93-119, October.
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    13. Cai, Jun & Loughran, Tim, 1998. "The performance of Japanese seasoned equity offerings, 1971-1992," Pacific-Basin Finance Journal, Elsevier, vol. 6(5), pages 395-425, November.
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    18. Rangan, Srinivasan, 1998. "Earnings management and the performance of seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 50(1), pages 101-122, October.
    19. Spiess, D. Katherine & Affleck-Graves, John, 1995. "Underperformance in long-run stock returns following seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 38(3), pages 243-267, July.
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