Takeover Protection and Managerial Myopia: Evidence from Real Earnings Management

52 Pages Posted: 5 May 2012 Last revised: 9 Aug 2012

See all articles by Yijiang Zhao

Yijiang Zhao

American University - Kogod School of Business

Kung Chen

University of Nebraska at Lincoln - College of Business Administration

Yinqi Zhang

American University

Michael Davis

University of Alaska Fairbanks - School of Management (SOM)

Date Written: January 24, 2012

Abstract

We examine whether takeover protection exacerbates or mitigates real earnings management (i.e., using abnormal real activities to meet near-term earnings targets). Consistent with Stein’s (1988) prediction that takeover pressure induces managerial myopia, we find that less-protected firms are associated with higher levels of real earnings management. We further disentangle the value-destroying and signaling effects of real earnings management by finding that although abnormal real activities in general are associated with lower future performance, abnormal real activities intended to just meet earnings targets are associated with higher future performance, consistent with real earnings management conveying a signal of superior future performance in addition to a general value-destroying effect. Taken together, our evidence suggests that takeover protection reduces managers’ pressure to resort to real earnings management as a costly means of signaling better future performance.

Keywords: takeover protection, real earnings management, managerial myopia

JEL Classification: M41, M43, G34

Suggested Citation

Zhao, Yijiang and Chen, Kung and Zhang, Yinqi and Davis, Michael, Takeover Protection and Managerial Myopia: Evidence from Real Earnings Management (January 24, 2012). Journal of Accounting and Public Policy, Volume 1, Issue 1, January-February 2012, Available at SSRN: https://ssrn.com/abstract=2045798

Yijiang Zhao (Contact Author)

American University - Kogod School of Business ( email )

4400 Massachusetts Ave, NW
Washington, DC 20016
United States
202-885-1941 (Phone)

Kung Chen

University of Nebraska at Lincoln - College of Business Administration ( email )

1240 R Street
P.O. Box 880405
Lincoln, NE 68588-0405
United States

Yinqi Zhang

American University ( email )

4400 Massachusetts Ave NW
Washington, DC 20016
United States

Michael Davis

University of Alaska Fairbanks - School of Management (SOM) ( email )

P.O. Box 756080
Fairbanks, AK 99775-0500
United States

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