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Purpose: T his study aim s to e xplore t he e ffect of f inancial c onstraints o n earnings m anagement by f ocusing on firms that issue redeemable convertible preferred stocks (RCPS). RCPS are considered a financing option primarily used by firms that have investment opportunities but face difficulties in raising funds with a low cost of capital. Therefore, the issuance of RCPS can be an effective indicator to identify firms with financial constraints. Design/methodology/approach: This study employs a sample of 12,406 firm-year observations of listed companies in the Korean stock market from 2011 to 2018. The study conducts multiple regression analyses to investigate the level of earnings management of RCPS-issuing firms with respect to that of non-issuing firms. In this analysis, the earnings management is proxied by discretionary accruals and real operational activities. Findings: This study shows that RCPS-issuing firms have a higher level of discretionary accruals than non-issuing firms. Meanwhile, there is no significant difference in the level of real activities management between RCPS-issuing and non-issuing firms. These findings imply that firms with financial constraints engage in aggressive earnings management through discretionary accruals rather than real operational activities. Research limitations/implications: This study provides compelling evidence that financially constrained firms strategically use discretionary accruals to signal positive prospects for external capital suppliers, allowing them to raise the capital necessary for investment. It is also confirmed that financially constrained firms do not depend on real activities management, which sacrifices cash flows and firm value in the long run. Originality/value: T his is t he f irst s tudy t o test t he l ink between f inancial c onstraints a nd e arnings m anagement by analyzing RCPS-issuing firms that conform to the definition of financial constraints. This approach can alleviate the risk of errors in the classification of firms and the endogeneity problems accompanied by estimating financially constrained firms with firm characteristics, such as dividend payout ratio, cash flows, size, age, or a combined index of these variables.

We assess market valuation of airline convertible preferred stocks using a contingent claims valuation model that was extensively tested by Ramanlal et al. (Rev Quant Financ Account 10:303–319, 1998 ). Our sample consists of 4,096 daily price observations of 11 convertible preferred stocks issued by the U.S. airlines in 1980–1991. For each convertible we estimate daily model prices for 2 years after issuance and compare them with market prices by calculating pricing errors. While the entire sample’s mean pricing error is found to be negative 3.8%, the panel data analysis and the mean pricing errors of the sub-samples indicate that the undervaluation is much more severe in the first 6 months of trading. The results suggest that airlines leave about 10% on the table when they raise capital by issuing convertible securities.

Normally entrepreneur would raise fund from angel investors during the initial round. If the venture program was by then successful, the entrepreneur would then continue the fund-raising process from venture capitalist. By adopting the convertible preferred stock, we managed to construct the two-stage angel investment decision process. This research reveals the following: (1) The probability of the first stage’s success has negative relationships with levels of priority dividend in both first and second stages, as well as with the venture capitalist’s proportion of shares. (2) The probability of the second stage’s success has negative relationships with the venture capitalist’s proportion of shares and the dividend level of both first and second stage funding. (3) There has been a threshold of dividend distribution, which belongs to angel investor. While the level of angel investor’s shares is higher than the threshold, AN would decide to join the second phase of the program; otherwise, AN would exit the project at the end of the first stage.