Earnings Management and Corporate Spin-Offs

Posted: 14 Feb 2011 Last revised: 18 Jun 2013

See all articles by Ying Chou Lin

Ying Chou Lin

Southeastern Oklahoma State University - Department of Accounting and Finance

Kenneth Yung

Old Dominion University - Finance

Date Written: 2013

Abstract

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

Lin, Ying Chou and Yung, Kenneth, Earnings Management and Corporate Spin-Offs (2013). Available at SSRN: https://ssrn.com/abstract=1759594 or http://dx.doi.org/10.2139/ssrn.1759594

Ying Chou Lin (Contact Author)

Southeastern Oklahoma State University - Department of Accounting and Finance ( email )

1405 N. 4th
Durant, OK 74701
United States

Kenneth Yung

Old Dominion University - Finance ( email )

School of Business and Public Administration
Norfolk, VA 23529-0222
United States
757-683-3573 (Phone)

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