Abstract
A staggered board can substantially protect a firm’s incumbents from takeover in either a hostile acquisition or a proxy contest. We use the existence of a staggered board as enhanced takeover protection and examine the association between staggered boards and earnings manipulation. Following a rigorous procedure to identify a sample of restating firms that overstated earnings, manually collecting data on several governance characteristics and using a matched-pairs methodology, we find that firms with staggered boards are less likely to overstate earnings. One potential interpretation of our results is that staggered boards lessen takeover threats and thus mitigate managers’ pressure to overstate earnings.
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Notes
Yermack (2006) finds that stock markets respond negatively to the initial disclosure of perquisite consumption by executives, a relatively mild form of managerial self-dealing.
Furthermore, Harford (2003) finds, after a completed takeover bid, that the target firms’ directors hold fewer directorships than before.
We also performed a sensitivity test using a sample consisting of both overstatements and understatements, but failed to find a significant association between staggered boards and the likelihood of financial misstatements (untabulated).
Maddala (1991) suggests that a regular logit regression is appropriate for research designs with unequal sampling rates from case and control groups.
Following Frankel et al. (2002), we measure LitigRisk based on industry-level litigation risk. An alternative approach to measure litigation risk is based on firm-level earnings data (Francis et al. 1994). The main result regarding the association between StagBoard and Overstate remains essentially unchanged (untabulated).
As discussed in Sect. 5, the sample selection procedure controls for firm size by selecting control firms that match each misstatement firm in size.
There is no evidence that the restatements announced during this period differ substantially from those in other periods. Prior studies (e.g., Efendi et al. 2007) also begin with a partial list of the GAO restating firms to form their misstatement samples.
The EITF is an organization formed in 1984 by the Financial Accounting Standards Board (FASB) to identify emerging issues and resolve them with a uniform set of practices before divergent methods become widespread. Several rules issued by the EITF require certain charges (e.g., shipping and handling charges) be removed from both revenues and expenses, though some companies had included such charges in both revenues and expenses. The SAB 101, “Revenue Recognition in Financial Statements,” identifies four criteria that ought to be met before product revenue can be recognized.
The fact that the GAO database cuts off its data of restatement announcements in June 2002 may be one of the reasons for the relatively low number of overstating firms in 2001.
Allison (1990) points out that a value above 2.5 may be a cause for concern for logistic regression.
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Acknowledgements
The authors would like to thank two anonymous referees and participants at the 2007 Western Region AAA Annual Conference and 2008 Asian-Pacific Conference on International Accounting Issues for helpful comments and suggestions.
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Zhao, Y., Chen, K.H. & Yao, L.J. Effects of takeover protection on earnings overstatements: evidence from restating firms. Rev Quant Finan Acc 33, 347–369 (2009). https://doi.org/10.1007/s11156-009-0128-9
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DOI: https://doi.org/10.1007/s11156-009-0128-9