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.
We explore how various aspects of corporate governance influence the likelihood of a public corporation being acquired, going private or going bankrupt when one acknowledges the potential endogeneity of these governance features to these outcomes. Our evidence confirms that some corporate governance features are endogenous variables in regression models that estimate the probability of these outcomes. After accounting for endogeneity, we find evidence that outsider dominated boards and lower restrictions on internal governance play major roles in the way firms exit public markets. Interestingly, our results suggest that several corporate governance features are more important determinants of a firm’s exit than many economic factors that have figured prominently in prior research.
We study a sample of U.S. firms from 1990 to 2012 and investigate how changes in their operating environment impacted their tendency to manage reported earnings. We also study which methods firms use to manage earnings over time, and the relationships among such choices. We detect shifts in earnings management that we associate with significant tax, regulatory, and economic changes over our sample period. Changes in executive compensation are important in explaining some of these shifts. We also find that the relationships between different forms of earnings management vary over time and are more complex than prior research would suggest.
There are two separate streams of research that share an overlooked linkage: the first relates a firm’s sales and general administrative expense to its capital structure and stock returns; the second associates a firm’s use of operating leases to its capital structure and stock returns. We show that these separate streams of research are driven by how a firm’s operating lease expense influences its asset volatility. Further, we extend our argument to the pricing of corporate debt and find significant evidence to support our conjectures.
The corporate charter is a contract between the firm and the state. Prior literature on contracts suggests three primary motives for contracting: risk shifting, incentive alignment, and transaction cost minimization. We argue that the characteristics of the industry within which a firm operates should influence the design of corporate charters/bylaws because firms within an industry face similar risk shifting, incentive alignment, and transaction cost concerns, and so similar internal control and change in control concerns. Using data on a sample of U.S. corporations, we find evidence that: (1) there is substantial variation in governance provisions across industries; (2) the influence of selected industry characteristics differ across provisions; and (3) charter provisions cluster according to the industry characteristics that influence their incidence, which explains correlations between provisions within industries.
We investigate how the availability of bank credit influences how public firms manage their working capital, and particularly those firms that depend more on the availability of such credit. We not only provide an enhanced understanding of what significantly influences corporate working capital management, but also find that on average, reductions (increases) in bank credit was associated with increases (decreases) in both a firm’s current assets and its current liabilities. Further, we find that these responses are very similar for bank dependent and non-bank dependent firms, except in cash holdings and supply chain financing. Overall, our evidence points to the use of trade credit and reverse trade credit as important buffers to changes in the availability of bank credit.