Takeover Threats, Job Security Concerns, and Earnings Management
60 Pages Posted: 12 Sep 2017 Last revised: 26 Apr 2018
Date Written: April 17, 2018
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: Suggested Citation