Earnings Myopia and Private Equity Takeovers
53 Pages Posted: 10 Sep 2021 Last revised: 13 Sep 2021
Date Written: September 8, 2021
We examine whether earnings myopia among publicly traded companies motivates private equity firms to acquire them. Using a sample of private equity takeovers, we show that multiple measures of myopia increase the likelihood of takeover by private equity buyers. In contrast, private takeovers motivated for strategic reasons do not have a similar association with myopia measures, nor do takeovers by public firms. We further show that post-takeover, firms exhibit significantly less earnings myopia, including increased investment in R&D. Our results suggest that the cost of earnings myopia can be sufficiently large to warrant a takeover by private equity and contributes to the shrinking number of publicly traded firms.
Keywords: myopia, real earnings management, private equity takeover, going private
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