Hostname: page-component-8448b6f56d-mp689 Total loading time: 0 Render date: 2024-04-24T08:19:42.768Z Has data issue: false hasContentIssue false
  • English
  • Français

Earnings Management and Stock Performance of Reverse Leveraged Buyouts

Published online by Cambridge University Press:  06 April 2009

De-Wai Chou ,
Michael Gombola  and
Feng-Ying Liu
De-Wai Chou
Affiliation:
dwchou@saturn.yzu.edu.tw, Department of Finance, College of Business Administration, Yuan Ze University, Jung-Li, Taiwan
Michael Gombola
Affiliation:
gombola@drexel.edu, Department of Finance, LeBow College of Business Administration, Drexel University, Philadelphia, PA 19104
Feng-Ying Liu
Affiliation:
liuf@rider.edu, Department of Finance, College of Business Administration, Rider University, Lawrenceville, NJ 08648.
Get access Rights & Permissions [Opens in a new window]

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% and 25% 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 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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 2 , June 2006 , pp. 407 - 438
Copyright
Copyright © School of Business Administration, University of Washington 2006

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Barber, B. M., and Lyon, J. D.. “Detecting Long-Run Abnormal Stock Returns: The Empirical Power and Specification of Test-Statistics.” Journal of Financial Economics, 43 (1997), 341–372.CrossRefGoogle Scholar
Beatty, R. P., and Ritter, J. R.. “Investment Banking, Reputation, and the Underpricing of Initial Public Offerings.” Journal of Financial Economics, 15 (1986), 213–232.CrossRefGoogle Scholar
Brav, A.; Geczy, C.; and Gompers, P. A.. “Is the Abnormal Return following Equity Issuances Anomalous?” Journal of Financial Economics, 56 (2000), 209–249.CrossRefGoogle Scholar
Cotter, J. F., and Peck, S. W.. “The Structure of Debt and Active Equity Investors: The Case of the Buyout Specialist.” Journal of Financial Economics, 59 (2001), 101–147.CrossRefGoogle Scholar
DuCharme, L. L; Malatesta, P. H.; and Sefcik, S. E.. “Earnings Management, Stock Issues, and Shareholder Lawsuits.” Journal of Financial Economics, 71 (2004), 27–44.CrossRefGoogle Scholar
Degeorge, F., and Zeckhauser, R.. “The Reverse LBO Decision and Firm Performance: Theory and Evidence.” Journal of Finance, 48 (1993), 1323–1348.CrossRefGoogle Scholar
Eckbo, B. E.; Masulis, R. W.; and Norli, O.. “Seasoned Public Offerings: Resolution of the ‘New Issues’ Puzzle.” Journal of Financial Economics, 56 (2000), 251–291.CrossRefGoogle Scholar
Fama, E., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Halpern, P.; Kieschnick, R.; and Rotenberg, W.. “On the Heterogeneity of Leveraged Going-Private Transactions.” Review of Financial Studies, 12 (1999), 281–309.CrossRefGoogle Scholar
Hertzel, M.; Lemmon, M.; Linck, J. S.; and Rees, L.. “Long-Run Performance following Private Placements of Equity.” Journal of Finance, 57 (2002), 2595–2617.CrossRefGoogle Scholar
Holthausen, R. W., and Larcker, D. F.. “The Financial Performance of Reverse Leveraged Buyouts.” Journal of Financial Economics, 42 (1996), 293–332.CrossRefGoogle Scholar
Jegadeesh, N.; Weinstein, M.; and Welch, I.. “An Empirical Investigation of IPO Returns and Subsequent Equity Offerings.” Journal of Financial Economics, 34 (1993), 153–175.CrossRefGoogle Scholar
Jones, J. J. “Earnings Management during Import Relief Investigations.” Journal of Accounting Research, 29 (1991), 193–228.CrossRefGoogle Scholar
Kaplan, S. N. “The Staying Power of Leveraged Buyouts.” Journal of Financial Economics, 29 (1991), 287–314.CrossRefGoogle Scholar
Kothari, S. P., and Warner, J. B. A.. “Measuring Long-Horizon Security Performance.” Journal of Financial Economics, 43 (1997), 301–339.CrossRefGoogle Scholar
Loughran, T., and Ritter, J.. “The New Issues Puzzle.” Journal of Finance, 50 (1995), 23–51.CrossRefGoogle Scholar
Loughran, T., and Ritter, J.. “Uniformly Least Powerful Tests of Market Efficiency.” Journal of Financial Economics, 55 (2000), 361–389.CrossRefGoogle Scholar
Lyon, J. D.; Barber, B. M.; and Tsai, C.-L.. “Improved Methodology for Tests of Long-Run Abnormal Stock Returns.” Journal of Finance, 54 (1999), 165–201.CrossRefGoogle Scholar
Mian, S., and Rosenfeld, J.. “Takeover Activity and the Long-Run Performance of Reverse Leveraged Buyouts.” Financial Management, 22 (1993), 46–57.CrossRefGoogle Scholar
Mitchell, M. L., and Stafford, E.. “Managerial Decisions and Long-Run Stock Price Performance.” Journal of Business, 73 (2000), 287–320.CrossRefGoogle Scholar
Muscarella, C. J., and Vetsuypens, M. R.. “Efficiency and Organizational Structure: A Study of Reverse LBOs.” Journal of Finance, 45 (1990), 1389–1413.CrossRefGoogle Scholar
Perry, S. E., and Williams, T. H.. “Earnings Management preceding Management Buyout Offers.” Journal of Accounting and Economics, 18 (1994), 157–179.CrossRefGoogle Scholar
Rangan, S. “Earnings Management and the Performance of Seasoned Equity Offerings.” Journal of Financial Economics, 50 (1998), 101–122.CrossRefGoogle Scholar
Rao, G. R. “The Relation between Stock Return and Earnings: A Study of Newly-Public Firms.” Working Paper, Kidder Peabody and Co., New York, NY (1993).Google Scholar
Ritter, J. R. “The Long Run Performance of Initial Public Offerings.” Journal of Finance, 46 (1991), 3–28.Google Scholar
Schultz, P. “Pseudo Market Timing and the Long-Run Underperformance of IPOs.” Journal of Finance, 58 (2003), 483–517.CrossRefGoogle Scholar
Shivakumar, L. “Do Firms Mislead Investors by Overstating Earnings before Seasoned Equity Offerings?” Journal of Accounting and Economics, 29 (2000), 339–371.CrossRefGoogle Scholar
Spiess, D. K., and Affleck-Graves, J.. “Underperformance in Long-Run Stock Returns following Seasoned Equity Offerings.” Journal of Financial Economics, 38 (1995), 243–267.CrossRefGoogle Scholar
Teoh, S. H.; Welch, I.; and Wong, T. J.. “Earnings Management and the Long-Run Market Performance of Initial Public Offerings.” Journal of Finance, 53 (1998a), 1935–1974.CrossRefGoogle Scholar
Teoh, S. H.; Welch, I.; and Wong, T. J.. “Earnings Management and the Underperformance of Seasoned Equity Offering.” Journal of Financial Economics, 50 (1998b), 63–99.CrossRefGoogle Scholar
Welch, I. “Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings.” Journal of Finance, 44 (1989), 421–450.CrossRefGoogle Scholar