Earnings management, market discounts and the performance of private equity placements

Chen, An-Sing; Cheng, Lee‐Young; Cheng, Kuang-Fu; Chih, Shu-Wei

doi:10.1016/j.jbankfin.2009.12.013

Cited by 42 publications

(26 citation statements)

References 46 publications

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“…Therefore, in order to purge the impact of the discount on the CARs for bought deals, and making CAR comparable between bought deal and firm commitment offerings, I compute the discount-adjusted abnormal returns for bought deals. This method is commonly used in the private placement literature (e.g., Wruck, 1989;Hertzel and Smith, 1993;Chen et al, forthcoming). 15 Two direct equity issuance costs examined in this paper are DISCOUNT and FEE.…”

Section: Issuance Costs: Empirical Methodologymentioning

confidence: 99%

Bought deals: The value of underwriter certification in seasoned equity offerings

Pandes

2010

Journal of Banking & Finance

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Section: Issuance Costs: Empirical Methodologymentioning

confidence: 99%

Bought deals: The value of underwriter certification in seasoned equity offerings

Pandes

2010

Journal of Banking & Finance

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“…This result is in line with the empirical findings in Bajaj et al (2001), Krishnamurthy et al (2005), and Barclay et al (2007), and is consistent with the argument provided by Hertzel et al (2002) that private placement discount reflects overvaluation. In contrast to Chen et al (2010a) who document a significant negative relation between earnings management and long-run private placement return in the U.S. market, we fail to find any significant relation in our context. This difference could be due to fact that in China a private placement takes on average more than one year to complete.…”

Section: Baseline Regressionscontrasting

confidence: 99%

“…The second one is em, which is a proxy for earnings management. Chi and Gupta (2009) propose that overvaluation-induced income-increasing earnings management leads to lower future stock return, and Chen et al (2010a) confirm this relation in the context of private placements. We construct em following the adjusted Jones Model by Dechow et al (1995):…”

Section: Variables Constructionmentioning

confidence: 70%

“…Second, our paper adds to the literature on the long run performance of private placements. The literature has documented the long term under-performance of stocks following the issuance of private placements (Hertzel et al, 2002;Krishnamurthy et al, 2005;Chen et al, 2010a). Different factors have been proposed to explain this phenomenon; for instance, overvaluation hypothesis Hertzel et al (2002), agency problems Barclay et al (2007), and overoptimism hypothesis Marciukaityte et al (2005).…”

Section: Resultsmentioning

confidence: 99%

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Three Essays on Empirical Corporate Finance

Han¹

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This thesis comprises three essays on empirical corporate finance.The first essay provides a new explanation for investment-cash flow sensitivity from the perspective of CEO inside debt holdings. We examine the effect of CEO pensions and deferred compensation (inside debt) on investment-cash flow sensitivity for a sample of U.S. manufacturing firms from 2006 to 2012. We find that the firms with higher relative CEO leverage ratios (CEO's debt/equity ratio scaled by the firm's debt/equity ratio) generate higher investment-cash flow sensitivity. Moreover, one standard deviation increase in the logarithm of the relative CEO leverage ratio enlarges investmentcash flow sensitivity by 50%. This positive relationship still holds even after we take endogeneity and financial constraints into account.The second essay explores the net effect of a politically connected board on a firm. Using a quasinatural experiment in China -a regulatory change to forbid bureaucrats from sitting on the board of public firms -we address the causality by testing the market reaction. Those firms with politically connected directors who are targeted by the regulatory change show a significantly positive abnormal stock return on average. The result is robust for various model settings and for a matched sample using the propensity score methodology. Additionally, the announcement effect when a politically connected director resigns is significantly positive, and significantly higher than the effect when a non-connected director resigns. Overall, our results suggest that the agency cost effect of a politically connected director dominates the value effect.The third essay examines the effect of investor divergence of opinions on the long-run performance of private placements. We propose and construct a direct measure of investor divergence of opinion, based on auction bids data of the private placements in China. We find that firms with higher bids dispersion generate lower long-term stock returns after the issuance of private placements. This effect is economically significant and robust when controlling for market discount and for dispersion in analyst forecasts. Moreover, this negative relation is stronger for stocks with more stringent shortsale constraints. Our findings provide strong evidence in support of the Miller's (1977) divergence of opinion hypothesis.iii Declaration by AuthorThis thesis is composed of my original work, and contains no material previously published or written by another person except where due reference has been made in the text. I have clearly stated the contribution by others to jointly-authored works that I have included in my thesis.

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“…This study adds to the recent literature concerning managers' incentive to manipulate reported earnings (e.g., Fischer and Stocken, 2004;Yu et al, 2006;Chi and Gupta, 2009;Chen et al, 2010). The findings in this study have implications with respect to fundamental analysis, especially for users of accounting-based valuation models (e.g., Ohlson, 1995).…”

Section: Resultsmentioning

confidence: 62%