Earnings-Reducing Activities Before Management Buyouts

42 Pages Posted: 9 Oct 2017

See all articles by Xi Li

Xi Li

University of Arkansas - Department of Finance

Jun Qian

Fanhai International School of Finance, Fudan University; University of Pennsylvania - Wharton Financial Institutions Center

Julie Zhu

Fanhai International School of Finance(FISF), Fudan University

Multiple version iconThere are 2 versions of this paper

Date Written: August 19, 2013

Abstract

During the year prior to management buyout (MBOs) announcements, target firms exhibit abnormally high discretionary expenses in selling, general and administration, abnormally low discretionary accruals, and realize losses from asset sales. Higher discretionary expenses and losses from asset sales are associated with lower pre-MBO abnormal stock returns, especially for firms with higher insider ownership, less board and institutional monitoring, and higher information asymmetry. They are also associated with better post-MBO operating performance. None of these activities affects the likelihood of MBO deal completion, announcement period abnormal returns, or offer premium. These target firms do not show such abnormal activities in other years before the MBOs or after the MBOs. Our results suggest that outside investors and the market do not fully understand the earnings-reducing activities before MBOs.

Keywords: Management buyout, discretionary expenses, asset sales, accruals, stock return

JEL Classification: G34, G14, M41

Suggested Citation

Li, Xi and Qian, Jun and Zhu, Julie, Earnings-Reducing Activities Before Management Buyouts (August 19, 2013). Available at SSRN: https://ssrn.com/abstract=3049244 or http://dx.doi.org/10.2139/ssrn.3049244

Xi Li

University of Arkansas - Department of Finance ( email )

Fayetteville, AR 72701
United States

Jun Qian (Contact Author)

Fanhai International School of Finance, Fudan University ( email )

Shanghai
China
86-21-63895501 (Phone)
86-21-62934572 (Fax)

HOME PAGE: http://www.fisf.fudan.edu.cn/show-65-69.html

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
Philadelphia, PA 19104
United States

HOME PAGE: http://fic.wharton.upenn.edu/fic/

Julie Zhu

Fanhai International School of Finance(FISF), Fudan University ( email )

220 Handan Road
Shanghai, 200433
China

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