Earnings Management and Convertible Bond Arbitrage
46 Pages Posted: 18 Sep 2006
Date Written: September 2007
Abstract
We bring together two streams of research: one on earnings management and the other on convertible bond arbitrage. In doing so, we bring new insights on why convertible bond hedge funds benefit from convertible bond arbitrage. Specifically, we find that firms managing their earnings prior to their convertible bond issuance have: (1) poorer stock market and earnings performance after their issuance of convertible debt, (2) higher idiosyncratic volatility prior to issuance, (3) more equity like convertible bonds, and (4) an abnormal increase in the short selling of their stocks after issuance of convertible bond. Consequently, we provide evidence consistent with the notion that earnings management prior to the issuance of convertible bonds is a source of profits for convertible bond hedge funds that pursue convertible bond arbitrage.
Keywords: Earnings management, Convertible bond arbitrage, Convertible bond hedge funds
JEL Classification: G30, G32
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Are Convertible Bonds Underpriced?: An Analysis of the French Market
By Manuel Ammann, Axel H. Kind, ...
-
By Craig M. Lewis, Richard J. Rogalski, ...
-
Convertible Bond Arbitrageurs as Suppliers of Capital
By Darwin Choi, Mila Getmansky Sherman, ...
-
Convertible Bond Arbitrage, Liquidity Externalities and Stock Prices
By Darwin Choi, Mila Getmansky Sherman, ...
-
Convertible Bond Underpricing: Renegotiable Covenants, Seasoning and Convergence
By Alex Chan and Nai-fu Chen
-
The Rise and Demise of the Convertible Arbitrage Strategy
By Igor Loncarski, Jenke Ter Horst, ...
-
Why Do Convertible Issuers Simultaneously Repurchase Stock? An Arbitrage-Based Explanation
By Abe De Jong, Marie Dutordoir, ...
-
Why Do Convertible Issuers Simultaneously Repurchase Stock? An Arbitrage-Based Explanation
By Abe De Jong, Marie Dutordoir, ...
-
Are There Windows of Opportunity for Convertible Debt Issuance? Evidence for Western Europe