Earnings Management and Stock Performance of Reverse Leveraged Buyouts

60 Pages Posted: 8 Apr 2005

See all articles by De-Wai Chou

De-Wai Chou

National Taiwan Normal Univeristy

Michael Gombola

Drexel University - Department of Finance

Feng-Ying Liu

Rider University

Abstract

This study provides further evidence of earnings management around security offerings. We find positive and significant discretionary current accruals coincident with offerings of reverse LBOs. Issuers in the most "aggressive" quartile of earnings management have a one-year aftermarket return that is between 15 percent and 25 percent less than the most "conservative" quartile. We also find a negative and significant relation between abnormal accruals and post-issue abnormal returns within the first year after the offering. The relation remains even after controlling for book-to-market ratio, firm size, offering size and involvement of buyout specialists or management. Although earnings management has been used to explain post-issue long-term underperformance of IPOs and SEOs, our study shows that earnings management can explain post-offering returns of reverse LBOs, even in the absence of post-offering underperformance.

Keywords: Reverse leveraged buyout; Earnings management; Equity offering

JEL Classification: G30, G34

Suggested Citation

Chou, De-Wai and Gombola, Michael and Liu, Feng-Ying, Earnings Management and Stock Performance of Reverse Leveraged Buyouts. Available at SSRN: https://ssrn.com/abstract=684426

De-Wai Chou (Contact Author)

National Taiwan Normal Univeristy ( email )

No.31 Shida Road
Taipei, Taiwan 106
Taiwan
+886 2 77343305 (Phone)

Michael Gombola

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States

Feng-Ying Liu

Rider University ( email )

2083 Lawrenceville Road
Lawrenceville Township, NJ 08648
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
858
Abstract Views
4,915
Rank
52,011
PlumX Metrics