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Financial Reporting and Conflicting Managerial Incentives: The Case of Management Buyouts


Paul E. Fischer


University of Pennsylvania - The Wharton School

Henock Louis


Pennsylvania State University - Smeal College of Business

January 2008


Abstract:     
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.

Number of Pages in PDF File: 36

Keywords: MBO, earnings management, reporting incentives, debt financing

JEL Classification: G34, M41, M43, G24, G32

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Date posted: January 17, 2008 ; Last revised: April 7, 2008

Suggested Citation

Fischer, Paul E. and Louis, Henock, Financial Reporting and Conflicting Managerial Incentives: The Case of Management Buyouts (January 2008). Available at SSRN: http://ssrn.com/abstract=1084187 or http://dx.doi.org/10.2139/ssrn.1084187

Contact Information

Paul E. Fischer
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Henock Louis (Contact Author)
Pennsylvania State University - Smeal College of Business ( email )
University Park, PA 16802-3306
United States
814-865-4160 (Phone)
814-863-8393 (Fax)
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