An Empirical Analysis of Corporate Takeover Defenses and Earnings Management: Evidence from the U.S.
Posted: 27 May 2005
This study explores the impact of corporate takeover defenses on the extent of earnings management in the U.S. Theoretically, it is not obvious whether takeover defenses alleviate or exacerbate earnings management. I examine four well-known corporate takeover defenses; blank check preferred stock, poison pills, classified boards, and dual class stock. In spite of their similarity as takeover defenses, the empirical evidence indicates that they do not influence the degree of earnings management in the same way. Specifically, blank check preferred stock does not have a significant impact on earnings management. Poison pills and classified boards are found to reduce earnings management, on average, by 1.9% and 1.5% respectively. On the contrary, dual class stock exacerbates earnings management by increasing the degree of abnormal accruals by 2.6% on average. The results are robust even after controlling for firm size, profitability, financial distress, growth opportunities, and information asymmetry.
Keywords: Earnings management, takeover defenses
JEL Classification: G30, G34, M41, M43, G24
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