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This paper is based on Nader Hafzalla’s dissertation research at the University of Michigan. Nader died unexpectedly on June 29, 2006. He was a great student, a loyal friend and a ton of fun. His dissertation committee members are Russell Lundholm (chair), Patricia Dechow, Richard Sloan, and Sugato Bhattacharyya. Nader also received help on this work from all the faculty and doctoral students at Michigan, particularly Peter Demerjian, Michelle Hanlon, Sarah McVay, Venky Nagar, Cathy Shakespeare, Doug Skinner, Mark Soliman and Matt VanWinkle. We all miss him.
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.
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- Managerial incentives for discretionary disclosure: evidence from management leveraged buyouts
Nader M. Hafzalla
- Springer US
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