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Do Takeover Defenses Impair Equity Investors’ Perception of ‘Higher Quality’ Earnings?

51 Pages Posted: 23 Mar 2010 Last revised: 5 Sep 2014

Lee-Seok Hwang

Seoul National University - College of Business Administration

Woo-Jong Lee

Seoul National University

Date Written: May 13, 2011

Abstract

Prior studies show that managerial entrenchment deteriorates the credibility of earnings, hence reducing the value relevance of earnings. However, prior literature documents that the likelihood of earnings management is lower in firms with more antitakeover provisions since entrenched managers pursue a ‘quiet life’ instead of striving to maximize wealth of shareholders. Despite ‘higher quality’ earnings of such firms, we find that takeover protection impairs the perception of equity investors on earnings quality. We attribute this contradictory result to the failure of management to take risky but value-enhancing projects owing to pursuits of a quiet life. We also expect and find that investments of more defensive firms are valued at a discount, suggesting that equity investors expect such firms to take less advantage of their growth potentials. We corroborate this result by showing lower variability in firm value of more defensive firms.

Keywords: takeover defenses, earnings informativeness, earnings quality, market perception

JEL Classification: G34, M41

Suggested Citation

Hwang, Lee-Seok and Lee, Woo-Jong, Do Takeover Defenses Impair Equity Investors’ Perception of ‘Higher Quality’ Earnings? (May 13, 2011). Journal of Accounting, Auditing and Finance, Vol. 27, No. 3, 2012. Available at SSRN: https://ssrn.com/abstract=1574543 or http://dx.doi.org/10.2139/ssrn.1574543

Lee-Seok Hwang

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Woo-Jong Lee (Contact Author)

Seoul National University ( email )

Gwanak-ro 1, Gwanak-gu
Seoul, 151-916
Korea, Republic of (South Korea)

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