Earnings management and stock performance of reverse leveraged buyouts

De Wai Chou, Michael Gombola, Feng Ying Liu

Research output: Contribution to journalArticle

34 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)407-438
Number of pages32
JournalJournal of Financial and Quantitative Analysis
Volume41
Issue number2
DOIs
Publication statusPublished - 2006 Jun 1

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Earnings management
Stock performance
Leveraged buyouts
Management performance
Underperformance
Buy-out
Aftermarket
Abnormal accruals
Abnormal returns
Accruals
Firm size
Book-to-market ratio

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Earnings management and stock performance of reverse leveraged buyouts. / Chou, De Wai; Gombola, Michael; Liu, Feng Ying.

In: Journal of Financial and Quantitative Analysis, Vol. 41, No. 2, 01.06.2006, p. 407-438.

Research output: Contribution to journalArticle

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