Takeover Threats, Job Security Concerns, and Earnings Management

60 Pages Posted: 12 Sep 2017 Last revised: 26 Apr 2018

Edward Sul

George Washington University - School of Business

Date Written: April 17, 2018

Abstract

I exploit the international staggered adoption of takeover laws in order to examine the effect of increased CEO 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 activities (abnormally high accruals, small positive earnings, and poor accruals quality). This is consistent with managers responding to increased risk of termination by distorting earnings information. Results are particularly pronounced for managers facing the greatest risk of termination – those with high ex-ante forced turnover probability and leading firms with poor performance. The effects are mitigated in countries in which strong institutions potentially limit CEOs’ ability to manipulate accounting information. I further present results suggesting that the information environment for these firms has indeed deteriorated and become more opaque (decline in analyst forecast properties and liquidity). Overall, my results suggest that reforms aimed at enhancing governance through higher turnover sensitivity to performance also encourage earnings management by increasing CEOs’ 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

Sul, Edward, Takeover Threats, Job Security Concerns, and Earnings Management (April 17, 2018). Available at SSRN: https://ssrn.com/abstract=3034948 or http://dx.doi.org/10.2139/ssrn.3034948

Edward Sul (Contact Author)

George Washington University - School of Business ( email )

2201 G St NW
Funger Hall 607
Washington, DC 20052
United States
2029941434 (Phone)

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