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Earnings management and convertible preferred stock calls

Ayishat Omar and Alex P. Tang

International Review of Economics & Finance, 2019, vol. 63, issue C, 423-433

Abstract: The impact of convertible calls on stock returns and operating performance has intrigued researchers for many years. Many studies have examined this issue, but the evidence is not conclusive. In this study, we provide a comprehensive review of the literature and examine earnings management around calls of convertible preferred stock. We find that pre-call abnormal accruals are significantly positive. Coupled with the well-documented significantly positive abnormal stock returns during the pre-call period, this evidence raises the question of whether earnings are managed upward to boost stock prices and ensure conversion of called securities. However, our overall findings do not support the argument that high accruals in the pre-call period reflect deliberate earnings management to entice investors to convert their securities into equity ahead of subsequent poor performance.

Keywords: Convertible security calls; Convertible preferred stock; Stock returns; Operating performance; Earnings management (search for similar items in EconPapers)
JEL-codes: G14 G30 G32 G39 M40 M41 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.iref.2019.05.005

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