Accounting Papers

Document Type

Journal Article

Date of this Version

10-2008

Publication Source

Management Science

Volume

54

Issue

10

Start Page

1700

Last Page

1714

DOI

10.1287/mnsc.1080.0895

Abstract

We analyze the effect of external financing concerns on managers' financial reporting behavior prior to management buyouts (MBOs). Prior studies hypothesize that managers intending to undertake an MBO have an incentive to manage earnings downward to reduce the purchase price. We hypothesize that managers also face a conflicting reporting incentive associated with their efforts to obtain external financing for the MBO and to lower their financing cost. Consistent with our hypothesis, we find that managers who rely the most on external funds to finance their MBOs tend to report less negative abnormal accrual prior to the MBOs. In addition, the relation between external financing and abnormal accruals is tempered when there are more fixed assets that can serve as collateral for debt financing.

Keywords

MBO, earnings management, debt financing, managerial incentives

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Date Posted: 27 November 2017

This document has been peer reviewed.