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Private Placement of Common Equity, Insider Subscription and Earnings Management
Yun - Sheng Hsu,
National Chung Hsing University
Victoria Wang, National Chung Hsing University
Chun - Ho Chen, National Chung Hsing University
ABSTRACT. This paper examines the earning management behavior of private equity placement firms. We find that firms have incentives to engage in earnings management before the announcement date of private equity placement. However, the manipulation direction may be upward or downward according to the types of placement. Our empirical results indicate that management tends to manage reported earnings upward when the private placement is offered all by outsiders; whereas management tends to downward manage earnings when the private placement is subscribed by insiders. We speculate the reasons for the latter being that insiders downward manage earnings in order to under-estimate the offering prices for the benefit of their self-interests. In a word, the paper suggests that the direction of earnings management is decided by whether insiders are involved in the private placement.
Keywords: private placement, earnings management, discretional accrual, insiders subscription.
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