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

36 Pages Posted: 17 Jan 2008 Last revised: 7 Apr 2008

Paul E. Fischer

University of Pennsylvania - Accounting Department

Henock Louis

Pennsylvania State University - Smeal College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

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

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

Suggested Citation

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

Paul E. Fischer

University of Pennsylvania - Accounting Department ( 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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