Review of Accounting and Finance
Vol. 9 No. 1, 2010
# Emerald Group Publishing Limited
The issuance of convertible
bonds and earnings management:
evidence from Taiwan
Department of Accounting, National Chung Hsing University,
Taiwan, Republic of China
Department of Finance, Tainan University of Technology,
Taiwan, Republic of China, and
Department of Business Management, National Sun Yat-Sen University,
Taiwan, Republic of China
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.
Keywords Convertible bonds, Organizational earnings, Financial management, Taiwan
Paper type Research paper
If firms have valuable investment opportunities, they will raise funds from many channels.
Based on the pecking order theory, firms prefer internal to external financing, and debt
to equity, if they issue securities (Myers, 1984). However, capital market imperfections,
such as asymmetric information, risk shifting and over investment problems, create debt-
and equity-related cost of external finance (Lewis et al., 2001). Convertible bonds can
simultaneously mitigate both debt and equity related financing problems (Green, 1984).
Furthermore, well designed convertible bonds can restore investment incentives, so that
managers can make decisions that maximize a firm’s value (Abhyankar and Ho, 2006).
Teoh et al. (1998a) and Rangan (1998) find that firms underperform in the stock
market after seasoned equity issues, because investors may misinterpret high earnings
reported at the time of the offering, and consequently over value the new issues. In
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