Two essays on earnings management: Earnings management surrounding straight and convertible debt, and the intra-industry contagion effect of earnings restatements

Management has incentives to manage the level and the variance of reported earnings prior to security issues to lower the cost of financing. We investigate the level and variance of accruals around straight and convertible debt issues to see if earnings are managed around the issues. We also measure the market reaction to the issue announcements to determine if earnings management helps to explain the cross-section of returns. We find that straight debt issuing firms mange earnings to decrease reported income prior to issuing and that they suffer long-run post-issue stock underperformance following the issue. Convertible debt issuing firms manage earnings to increase reported income prior to the issue and that they suffer long-run post-issue underperformance. This study also investigates whether an intra-industry contagion or competitive effect exists for earnings restatement announcements. Characteristics of the industry, the firm, and the restatement are examined to identify their influence on the contagion effect or competitive effect. We find a significant negative stock price effect for the non-restating firms in response to a rival's earnings restatement. Industry characteristics, firm characteristics, and restatement characteristics do not appear to influence the contagion effect.