Earnings Management and Long-Run Stock Underperformance of Private Placements

Steven D. He, San Jose State University
D. Yang, University of Hawaii, Manoa
L. Guan, University of Hawaii, Manoa

Copyright © 2011 Allied Academies.


The study investigates whether private placement issuers manipulate their earnings around the time of issuance and the effect of earnings management on the long-run stock performance. We find that managers of U.S. private placement issuers tend to engage in income-increasing earnings management in the year prior to the issuance of private placements. We further speculate that earnings management serves as a likely source of investor over-optimism at the time of private placements. To support this speculation, we find evidence suggesting that the income-increasing accounting accruals made at the time of private placements predict the post-issue long-term stock underperformance. The study contributes to the large body of literature on earnings manipulation around the time of securities issuance.