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Earnings Management and Stock Performance of Reverse Leveraged Buyouts

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  • Chou, De-Wai
  • Gombola, Michael
  • Liu, Feng-Ying

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.

Suggested Citation

  • Chou, De-Wai & Gombola, Michael & Liu, Feng-Ying, 2006. "Earnings Management and Stock Performance of Reverse Leveraged Buyouts," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(02), pages 407-438, June.
  • Handle: RePEc:cup:jfinqa:v:41:y:2006:i:02:p:407-438_00
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    Cited by:

    1. Jerry Cao, 2013. "Private equity, RLBOs and IPO performance," Chapters,in: Handbook of Research on IPOs, chapter 18, pages 375-399 Edward Elgar Publishing.
    2. Cumming, Douglas & Siegel, Donald S. & Wright, Mike, 2007. "Private equity, leveraged buyouts and governance," Journal of Corporate Finance, Elsevier, vol. 13(4), pages 439-460, September.
    3. Cao, Jerry & Lerner, Josh, 2009. "The performance of reverse leveraged buyouts," Journal of Financial Economics, Elsevier, vol. 91(2), pages 139-157, February.
    4. Paul E. Fischer & Henock Louis, 2008. "Financial Reporting and Conflicting Managerial Incentives: The Case of Management Buyouts," Management Science, INFORMS, vol. 54(10), pages 1700-1714, October.
    5. Li, Ting & Zaiats, Nataliya, 2017. "Information environment and earnings management of dual class firms around the world," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 1-23.
    6. De-Wai Chou & Michael Gombola & Feng-Ying Liu, 2010. "Earnings management and long-run stock performance following private equity placements," Review of Quantitative Finance and Accounting, Springer, vol. 34(2), pages 225-245, February.
    7. Sharon Katz, 2008. "Earnings Quality and Ownership Structure: The Role of Private Equity Sponsors," NBER Working Papers 14085, National Bureau of Economic Research, Inc.
    8. repec:ejn:ejefjr:v:5:y:2017:i:4:p:142-175 is not listed on IDEAS
    9. Lee, Gemma & Masulis, Ronald W., 2011. "Do more reputable financial institutions reduce earnings management by IPO issuers?," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 982-1000, September.
    10. Ronald Bremer & Bonnie Buchanan & Philip English, 2011. "The advantages of using quarterly returns for long-term event studies," Review of Quantitative Finance and Accounting, Springer, vol. 36(4), pages 491-516, May.
    11. Hsuan-Chi Chen & Sheng-Syan Chen & Chia-Wei Huang & John D. Schatzberg, 2014. "Insider Trading and Firm Performance Following Open Market Share Repurchase Announcements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(1-2), pages 156-184, January.

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