Earnings Management and Corporate Spin-Offs
Posted: 14 Feb 2011 Last revised: 18 Jun 2013
Date Written: 2013
InIn this study we examine whether firms manage earnings before pursuing corporate spinoffs. Using a sample of 226 completed spinoffs between 1985 and 2005, we find strong evidence of pre-spinoff earnings management among parent firms involved in non-focus-increasing spinoffs. We also find higher levels of earnings management among parent firms that have a higher level of information asymmetry prior to spinoff announcements. Our regression results show a significant negative relation between income-increasing earnings management and the announcement period returns for non-focus-increasing spinoffs. In addition, a significant positive relation is found between income-increasing earnings management and the announcement period returns for focus-increasing spinoffs. The results suggest that income-increasing earnings management sends out negative signals about non-focus-increasing spinoffs but positive signals about focus-increasing spinoffs.
Keywords: Corporate spinoff, Divestiture, Focus, Earnings management, Accounting accruals
JEL Classification: G14, M41
Suggested Citation: Suggested Citation