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Earnings quality effect of state antitakeover statutes

Author

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  • Zhao, Yijiang
  • Chen, Kung H.

Abstract

Existing theories suggest two opposite effects that antitakeover protection may have on earnings management: the exacerbating effect and the mitigating effect. We use the introduction of state antitakeover laws during the mid- to late-1980s as a natural experiment to test the relationship between antitakeover protection and earnings quality. The results show that firms incorporated in states that passed the laws have lower magnitudes of abnormal accruals and higher levels of earnings informativeness in the post-passage periods, suggesting that antitakeover protection mitigates earnings management and enhances earnings quality. Further evidence shows that reductions in earnings management are concentrated in firms with low firm-level antitakeover protection and in firms with serious agency problems, and that the earnings management effect of state antitakeover laws is likely to be of short-term duration.

Suggested Citation

  • Zhao, Yijiang & Chen, Kung H., 2009. "Earnings quality effect of state antitakeover statutes," Journal of Accounting and Public Policy, Elsevier, vol. 28(2), pages 92-117.
    • Handle: RePEc:eee:jappol:v:28:y:2009:i:2:p:92-117
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    Cited by:

    1. Wang, Ke, 2023. "Essays in corporate risk," Other publications TiSEM 8c076f0d-2c02-40a4-b6d7-e, Tilburg University, School of Economics and Management.
    2. Bhargava, Rahul & Faircloth, Sheri & Zeng, Hongchao, 2017. "Takeover protection and stock price crash risk: Evidence from state antitakeover laws," Journal of Business Research, Elsevier, vol. 70(C), pages 177-184.

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