Earnings Management and Convertible Bond Arbitrage

46 Pages Posted: 18 Sep 2006

See all articles by Oktay Urcan

Oktay Urcan

University of Illinois at Urbana-Champaign

Robert L. Kieschnick

University of Texas at Dallas

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

Urcan, Oktay and Kieschnick, Robert L., Earnings Management and Convertible Bond Arbitrage (September 2007). Available at SSRN: https://ssrn.com/abstract=817164 or http://dx.doi.org/10.2139/ssrn.817164

Oktay Urcan (Contact Author)

University of Illinois at Urbana-Champaign ( email )

515 E. Gregory Drive
4009 BIF MC-520
Champaign, IL 61820
United States
217-265-0383 (Phone)
217-244-0902 (Fax)

HOME PAGE: http://business.illinois.edu/profile/oktay-urcan/

Robert L. Kieschnick

University of Texas at Dallas ( email )

800 W. Campbell Rd, SM31
Richardson, TX 75080
United States
972-883-6273 (Phone)

HOME PAGE: http://www.utdallas.edu/~rkiesch/

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