Advertisement

Review of Accounting Studies

, Volume 14, Issue 4, pp 507–533 | Cite as

Managerial incentives for discretionary disclosure: evidence from management leveraged buyouts

  • Nader M. Hafzalla
Article

Abstract

Managers in management leveraged buyout (MBO) firms prefer to purchase their firms at a low offer price. This motive gives them a clear incentive to make pessimistic discretionary disclosures. Using a sample of press releases, I find that managers involved in their firms’ MBO selectively release negative disclosures to denigrate their firm just before the MBO transaction when compared with prior period: they issue more bad news disclosures and more pessimistic quotes. Additionally, they issue less optimistic quotes, fewer good news disclosures, less positive earnings forecasts, and they manage earnings downwards. I control for factors that may not be caused by managers’ purchase motives by comparing the MBO sample with a third-party leveraged buyout sample where management is not involved in the buyout and with a performance-matched control sample. I find that the disclosure of MBO firms becomes significantly more pessimistic than the leveraged buyout firms where management is not involved in the transaction and significantly more pessimistic than the performance-matched control sample.

Keywords

Leveraged buyout Management buyout Disclosure 

JEL Classifications

G24 M41 

References

  1. Aboody, D., & Kasznik, R. (2000). CEO stock option awards and the timing of corporate voluntary disclosures. Journal of Accounting and Economics, 29, 73–100.CrossRefGoogle Scholar
  2. Bruner, R. F., & Paine, L. S. (1988). Management buyouts and managerial ethics. California Management Review, 302, 89–106.Google Scholar
  3. DeAngelo, L. (1986). Accounting numbers as market valuation substitutes: A study of management buyouts of public stockholders. The Accounting Review, 61(3), 400–420.Google Scholar
  4. DeAngelo, H., DeAngelo, L., & Rice, E. M. (1984). Going private: Minority freezeouts and stockholder wealth. Journal of Law and Economics, XXVII(October), 367–401.Google Scholar
  5. Dechow, P., Sloan, R., & Sweeney, A. (1996). Causes and consequences of earnings manipulations: An analysis of firms subject to enforcement actions by the SEC. Contemporary Accounting Research, 13, 1–36.CrossRefGoogle Scholar
  6. Erickson, M., & Wang, S. (1999). Earnings management by acquiring firms in stock for stock mergers. Journal of Accounting and Economics, 27, 149–176.CrossRefGoogle Scholar
  7. Fudenberg, D., & Tirole, J. (1986). A “signal jamming” theory of predation. The RAND Journal of Economics, 17(3), 366–376.CrossRefGoogle Scholar
  8. Gould, W. (1992). Quantile regression with bootstrapped standard errors. Stata Technical Bulletin, 9, 19–21.Google Scholar
  9. Harlow, W., & Howe, J. (1993). Leveraged buyouts and insider nontrading. Financial Management, 22(1), 109–118.CrossRefGoogle Scholar
  10. Healy, P., Hutton, A., & Palepu, K. (1999). Stock performance and intermediation changes surrounding sustained increases in disclosure. Contemporary Accounting Research, 16(3), 485–520.Google Scholar
  11. Huber, P. J. (1967). The behavior of maximum likelihood estimates under nonstandard conditions. In Proceedings of the Fifth Berkeley Symposium on Mathematical Statistics and Probability (Vol. 1, pp. 221–223). Berkeley: University of California Press.Google Scholar
  12. Hutton, A., Miller, G., & Skinner, D. (2000). The role of supplementary statements with management earnings forecasts. Journal of Accounting Research, 41, 867–890.CrossRefGoogle Scholar
  13. Jones, J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193–228.CrossRefGoogle Scholar
  14. Kasznik, R. (1999). On the association between voluntary disclosure and earnings management. Journal of Accounting Research, 37(1), 57–81.CrossRefGoogle Scholar
  15. Kothari, S. P., Leone, A., & Wasley, C. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39, 163–197.CrossRefGoogle Scholar
  16. Lang, M., & Lundholm, R. (1993). Cross-sectional determinants of analyst ratings of corporate disclosures. Journal of Accounting Research, 31(2), 246–271.CrossRefGoogle Scholar
  17. Lang, M., & Lundholm, R. (2000). Voluntary disclosure and equity offerings: Reducing information asymmetry or hyping the stock? Contemporary Accounting Research, 17(4), 623–662.CrossRefGoogle Scholar
  18. Lowenstein, L. (1986). No more cozy management buyouts. Harvard Business Review, 641, 147–156.Google Scholar
  19. Lev, B., & Penman, S. H. (1990). Voluntary forecast disclosure, nondisclosure, and stock prices. Journal of Accounting Research, 28(1), 49–76.CrossRefGoogle Scholar
  20. Ofek, E. (1994). Efficiency gains in unsuccessful management buyouts. Journal of Finance, 49, 637–654.CrossRefGoogle Scholar
  21. Peck, S. W. (1996). The influence of professional investors on the failure of management buyout attempts. Journal of Financial Economics, 40, 267–294.CrossRefGoogle Scholar
  22. Perry, S. E., & Williams, T. H. (1994). Earnings management preceding management buyout offers. Journal of Accounting and Economics, 18, 157–179.CrossRefGoogle Scholar
  23. Rogers, W. H. (1993). Regression standard errors in clustered samples. Stata Technical Bulletin, 13, 19–23.Google Scholar
  24. Shleifer, A., & Vishny, R. (1987). Management buyouts as a response to market pressure. In A. J. Auerbach (Ed.), Mergers and acquisitions. Chicago: University of Chicago Press.Google Scholar
  25. Skinner, D. (1997). Earnings disclosures and stockholder lawsuits. Journal of Accounting and Economics, 23, 249–282.CrossRefGoogle Scholar
  26. Stein, J. (1989). Efficient capital markets, inefficient firms: A model of myopic corporate behavior. The Quarterly Journal of Economics, 104(4), 655–669.CrossRefGoogle Scholar
  27. White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48, 817–838.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Ross School of BusinessUniversity of MichiganAnn ArborUSA

Personalised recommendations