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Earnings management and corporate spinoffs

Author

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  • Ying Lin

    ()

  • Kenneth Yung

    ()

Abstract

In this study we examine whether firms manage earnings before pursuing corporate spinoffs. Using a sample of 226 completed spinoffs between 1985 and 2005, we find strong evidence of pre-spinoff earnings management among parent firms involved in non-focus-increasing spinoffs. We also find higher levels of earnings management among parent firms that have a higher level of information asymmetry prior to spinoff announcements. Our regression results show a significant negative relation between income-increasing earnings management and the announcement period returns for non-focus-increasing spinoffs. In addition, a significant positive relation is found between income-increasing earnings management and the announcement period returns for focus-increasing spinoffs. The results suggest that income-increasing earnings management sends out negative signals about non-focus-increasing spinoffs but positive signals about focus-increasing spinoffs. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Ying Lin & Kenneth Yung, 2014. "Earnings management and corporate spinoffs," Review of Quantitative Finance and Accounting, Springer, vol. 43(2), pages 275-300, August.
  • Handle: RePEc:kap:rqfnac:v:43:y:2014:i:2:p:275-300
    DOI: 10.1007/s11156-013-0372-x
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    References listed on IDEAS

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    More about this item

    Keywords

    Corporate spinoff; Divestiture; Focus; Earnings management; Accounting accruals; G14; M41;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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