Earnings management and seasoned private equity placements: Evidence from U.S. and Japanese issuers

Abstract

Seasoned private equity placement is an important vehicle by which public firms obtain equity financing. This study seeks to accomplish three goals regarding the issuance of private placements: (1) to investigate managers' earnings manipulation behavior of U.S. issuers around the time of the issuance; (2) to examine whether such earnings manipulation behavior helps explain the long-term post-issue stock underperformance; and (3) to provide further evidence from Japanese private placement issuers regarding the pattern of earnings management around the time of issuance and the extent to which it can explain the post-issue stock underperformance. The results show that managers of U.S. private placement issuers tend to engage in income-increasing earnings management around the time of the issuance and the income-increasing accounting accruals made at the time of private placements predict the post-issue stock underperformance. The study also finds that, similar to their U.S. counterparts, Japanese managers tend to report inflated earnings around the time of private placements issuance and the earnings management by Japanese private placement issuers in the year of issuance predicts the firm's post-issue stock underperformance.