Boards, Audit Committees, Earnings Management and Shareholder Returns in MBO's

43 Pages Posted: 13 Jul 2011

See all articles by Wallace N. Davidson

Wallace N. Davidson

Southern Illinois University at Carbondale - Department of Finance

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS)

Yixi Ning

University of Houston - Victoria - School of Business Administration

Ahmed Sakr

Independent

Date Written: July 12, 2011

Abstract

We relate the agency issues inherent in management buyouts and in earnings management. Income-reducing earnings management occurs prior to management buyouts. When insiders own small amounts of stock, outside monitoring mechanisms such as institutional ownership and Big Six audit firms reduce the level of earnings management. However, when insiders own large amounts of stock, the outside monitors have very little effect and inside monitors become more important. In these cases, smaller and more active audit committees reduce the level of earnings management. MBO firm earnings management does not appear to fool the stock market because the level of earnings management does not influence announcement-period abnormal returns. In a post-hoc examination of these issues in the years following Sarbanes-Oxley, we find that the pre-MBO earnings management becomes insignificant. This change may be due to the improvement in board and audit committee structure that we find in MBO firms following Sarbanes Oxley.

Keywords: MBO, earnings management, agency costs, agency theory, LBO

JEL Classification: G34, M41

Suggested Citation

Davidson, Wallace N. and Jiraporn, Pornsit and Ning, Yixi and Sakr, Ahmed, Boards, Audit Committees, Earnings Management and Shareholder Returns in MBO's (July 12, 2011). Available at SSRN: https://ssrn.com/abstract=1884464 or http://dx.doi.org/10.2139/ssrn.1884464

Wallace N. Davidson

Southern Illinois University at Carbondale - Department of Finance ( email )

Mail Code 4626
Carbondale, IL 62901-4626
United States
618-453-1429 (Phone)
618-453-5626 (Fax)

Pornsit Jiraporn (Contact Author)

Pennsylvania State University - School of Graduate Professional Studies (SGPS) ( email )

30 E. Swedesford Road
Malvern, PA 19355
United States
(484) 753-3655 (Phone)

HOME PAGE: http://www.personal.psu.edu/pxj11/index1.html

Yixi Ning

University of Houston - Victoria - School of Business Administration ( email )

2002 W Grand Pkwy
Katy, TX 77449
United States

Ahmed Sakr

Independent ( email )

No Address Available

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
159
Abstract Views
1,100
rank
193,663
PlumX Metrics