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The issuance of convertible bonds and earnings management: evidence from Taiwan

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  • Ruey-Dang Chang
  • Yee-Chy Tseng
  • Ching-Ping Chang
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    Abstract

    Purpose – The purpose of this paper is to examine whether companies engage in earnings management during the specific years when convertible bonds are issued and redeemed; also to determine if any differences exist in earnings management when convertible bonds are issued domestically or abroad. Design/methodology/approach – Discretionary current accruals are adopted as proxies for earnings management and the regression models are used to control the related variables. Findings – The empirical results indicate that companies conduct earnings management in the years when convertible bonds are issued, and that there is no significant difference between earnings management when convertible bonds are issued in Taiwan or abroad. However, data after 2001 indicate that companies issuing convertible bonds abroad perform less earnings management compared to those issuing convertible bonds domestically. The results show no significant difference in earnings management in the years when convertible bonds are redeemed; the reasons may be due to the relatively small sample size and that the majority of convertible bonds are still outstanding. Originality/value – This paper advances findings from previous studies, that firms conducting seasoned equity offerings manage earnings upward to increase the offering proceeds. This paper highlights the linkage between convertible bonds and earnings management. Conducting an integrated analysis of the relationship between convertible bonds and earnings management, it aims to provide a better understanding of the process.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Review of Accounting and Finance.

    Volume (Year): 9 (2010)
    Issue (Month): 1 (February)
    Pages: 65-87

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    Handle: RePEc:eme:rafpps:v:9:y:2010:i:1:p:65-87

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    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. Craig M. Lewis & Richard J. Rogalski & James K. Seward, 1999. "Is Convertible Debt a Substitute for Straight Debt or for Common Equity?," Financial Management, Financial Management Association, vol. 28(3), Fall.
    2. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
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    8. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    9. Abhyankar, Abhay & Ho, Keng-Yu, 2006. "Long-run abnormal performance following convertible preference share and convertible bond issues: New evidence from the United Kingdom," International Review of Economics & Finance, Elsevier, vol. 15(1), pages 97-119.
    10. Richardson, Vernon J, 2000. " Information Asymmetry and Earnings Management: Some Evidence," Review of Quantitative Finance and Accounting, Springer, vol. 15(4), pages 325-47, December.
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    12. Dechow, Patricia M., 1994. "Accounting earnings and cash flows as measures of firm performance : The role of accounting accruals," Journal of Accounting and Economics, Elsevier, vol. 18(1), pages 3-42, July.
    13. DeAngelo, Harry & DeAngelo, Linda & Skinner, Douglas J., 1994. "Accounting choice in troubled companies," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 113-143, January.
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    15. Stein, Jeremy C., 1992. "Convertible bonds as backdoor equity financing," Journal of Financial Economics, Elsevier, vol. 32(1), pages 3-21, August.
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