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

Listed author(s):
  • Daoping (Steven) He
Registered author(s):

    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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    File URL: http://www.emeraldinsight.com/10.1108/02686901011054872?utm_campaign=RePEc&WT.mc_id=RePEc
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    Article provided by Emerald Group Publishing in its journal Managerial Auditing Journal.

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

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    Handle: RePEc:eme:majpps:v:25:y:2010:i:6:p:569-590
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    1. Leuz, Christian & Nanda, Dhananjay & Wysocki, Peter D., 2003. "Earnings management and investor protection: an international comparison," Journal of Financial Economics, Elsevier, vol. 69(3), pages 505-527, September.
    2. Kang, Jun-Koo & Kim, Yong-Cheol & Stulz, Rene M, 1999. "The Underreaction Hypothesis and the New Issue Puzzle: Evidence from Japan," Review of Financial Studies, Society for Financial Studies, vol. 12(3), pages 519-534.
    3. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
    4. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    5. Wu, YiLin, 2004. "The choice of equity-selling mechanisms," Journal of Financial Economics, Elsevier, vol. 74(1), pages 93-119, October.
    6. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
    7. Jeffrey Gramlich & Ole Sørensen, 2004. "Voluntary management earnings forecasts and discretionary accruals: evidence from Danish IPOs," European Accounting Review, Taylor & Francis Journals, vol. 13(2), pages 235-259.
    8. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October.
    9. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
    10. Rangan, Srinivasan, 1998. "Earnings management and the performance of seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 50(1), pages 101-122, October.
    11. repec:bla:joares:v:21:y:1983:i:1:p:128-140 is not listed on IDEAS
    12. Shivakumar, Lakshmanan, 2000. "Do firms mislead investors by overstating earnings before seasoned equity offerings?," Journal of Accounting and Economics, Elsevier, vol. 29(3), pages 339-371, June.
    13. Chung, Richard & Firth, Michael & Kim, Jeong-Bon, 2002. "Institutional monitoring and opportunistic earnings management," Journal of Corporate Finance, Elsevier, vol. 8(1), pages 29-48, January.
    14. repec:bla:joares:v:29:y:1991:i:2:p:193-228 is not listed on IDEAS
    15. repec:hrv:faseco:30728046 is not listed on IDEAS
    16. Smith, Clifford Jr., 1986. "Investment banking and the capital acquisition process," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 3-29.
    17. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    18. Michael Hertzel & Michael Lemmon & James S. Linck & Lynn Rees, 2002. "Long-Run Performance following Private Placements of Equity," Journal of Finance, American Finance Association, vol. 57(6), pages 2595-2617, December.
    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.
    20. Teoh, Siew Hong & Welch, Ivo & Wong, T. J., 1998. "Earnings management and the underperformance of seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 50(1), pages 63-99, October.
    21. Subramanyam, K. R., 1996. "The pricing of discretionary accruals," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 249-281, October.
    22. Hertzel, Michael G & Smith, Richard L, 1993. " Market Discounts and Shareholder Gains for Placing Equity Privately," Journal of Finance, American Finance Association, vol. 48(2), pages 459-485, June.
    23. repec:bla:joares:v:37:y:1999:i:1:p:57-81 is not listed on IDEAS
    24. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 163-197, February.
    25. Field, Laura Casares & Sheehan, Dennis P., 2004. "IPO underpricing and outside blockholdings," Journal of Corporate Finance, Elsevier, vol. 10(2), pages 263-280, March.
    26. 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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