Yaping Mao, Luc Renneboog Do Managers Manipulate Earnings Prior to Management Buyouts? (01 Sep 2013) Available at ECGI: http://ecgi.global/working-paper/do-managers-manipulate-earnings-prior-management-buyouts
To address the question as to whether managers manipulate accounting numbers
downwards prior to management buyouts (MBOs), we implement an industry-adjusted
buyout-specific approach and receive an affirmative answer. In UK buyout companies, negative earnings manipulation (understating the earnings prior to the deal) often occurs, both by means of accrual management and real earnings management.
We demonstrate that MBOs are significantly more frequently subject to negative manipulation than leveraged buyouts (LBOs). In non-buyout firms, positive earnings management frequently occurs because it affects managers? bonuses and the likelihood of meeting or beating analysts? expectations which may trigger a positive market reaction. By means of an instrumental variables approach, we examine competing incentives affecting the degree and size of earnings manipulation. Our evidence implies that the (ex ante) perceived likelihood that an MBO will be undertaken has a strong significant effect on negative earnings management, while the external borrowing capacity of the buyout company is not determined by standard capital structure factors, such as earnings numbers. The implementation of the revised UK Corporate Governance Code of 2003 has somewhat reduced the degree of both accrual earnings and real management in MBOs, but since then other manipulation techniques (related to production costs and asset revaluations) are more frequently used, which may be induced by the fact that these manipulation methods are more difficult to detect.
The Dodd-Frank Act of 2010 mandated a number of regulatory reforms including a requirement that large U.S. public companies provide their shareholders with the opportunity to cast a non-binding vote on executive compensation. The
“say on...Read more
We study the role of facial appearance in corporate director (re-)elections by means of director photographs published in annual reports. We find that shareholders use inferences from facial appearance in corporate elections, as a better (higher...Read more
Are regulatory interventions delayed reactions to market failures or can regulators proactively pre-empt corporate misbehavior? From a public interest view, we would expect “effective” regulation to ex ante mitigate agency conflicts between...Read more
By means of social network methodology, we analyze the labor market (turnover and appointments) of executive and non-executive directors. Directors with strong networks are able to obtain labor market information that generates opportunities and...Read more