Financial Reporting and Conflicting Managerial Incentives: The Case of Management Buyouts
36 Pages Posted: 17 Jan 2008 Last revised: 7 Apr 2008
Date Written: January 2008
We analyze the effect of external financing concerns on managers' financial reporting behavior prior to management buyouts (MBOs). Prior studies hypothesize that managers intending to undertake an MBO have an incentive to manage earnings downward to reduce the purchase price. We hypothesize that managers also face a conflicting reporting incentive associated with their efforts to obtain external financing for the MBO and to lower their financing cost. Consistent with our hypothesis, we find that managers who rely the most on external funds to finance their MBOs tend to report less negative abnormal accruals prior to the MBOs. In addition, the relation between external financing and abnormal accruals is tempered when there are more fixed assets that can serve as collateral for debt financing.
Keywords: MBO, earnings management, reporting incentives, debt financing
JEL Classification: G34, M41, M43, G24, G32
Suggested Citation: Suggested Citation