Takeover Threats, Job Security Concerns, and Earnings Management
65 Pages Posted: 12 Sep 2017
Date Written: September 10, 2017
I exploit the international staggered adoption of takeover laws in order to examine the effect of increased turnover sensitivity to performance on managers’ financial reporting choices. Using a difference-in-difference design, I find that the enactment of laws designed to promote takeover activity is associated with greater earnings management (abnormally high accruals, small positive earnings, and poor accruals quality) and greater opacity (reduced analyst forecast accuracy and greater forecast dispersion). This is consistent with managers responding to increased risk of termination by distorting earnings information. As predicted, results are particularly pronounced for managers facing the greatest risk of termination – those with the highest ex-ante forced turnover probability and at firms with poor performance. The effects are mitigated in countries in which strong institutions can limit the CEOs’ ability to manage earnings and create opacity. Overall, my results suggest that reforms aimed at enhancing governance through higher turnover sensitivity to performance encourage earnings management and opacity by increasing job security concerns.
Keywords: Takeovers, Takeover Laws, Job Security, Turnover Sensitivity to Performance, Earnings Management, Transparency
JEL Classification: M41, M51, G34, G38, K33
Suggested Citation: Suggested Citation