Earnings management and stock performance of reverse leveraged buyouts

De Wai Chou*, Michael Gombola, Feng Ying Liu

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    38 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

    ASJC Scopus subject areas

    • Accounting
    • Finance
    • Economics and Econometrics

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