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Earnings Management and Stock Performance of Reverse Leveraged Buyouts

Published online by Cambridge University Press:  06 April 2009

De-Wai Chou ,
Michael Gombola  and
Feng-Ying Liu
De-Wai Chou
Affiliation:
dwchou@saturn.yzu.edu.tw, Department of Finance, College of Business Administration, Yuan Ze University, Jung-Li, Taiwan
Michael Gombola
Affiliation:
gombola@drexel.edu, Department of Finance, LeBow College of Business Administration, Drexel University, Philadelphia, PA 19104
Feng-Ying Liu
Affiliation:
liuf@rider.edu, Department of Finance, College of Business Administration, Rider University, Lawrenceville, NJ 08648.
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 2 , June 2006 , pp. 407 - 438
Copyright
Copyright © School of Business Administration, University of Washington 2006

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