Financial reporting and conflicting managerial incentives: The case of management buyouts

Paul E. Fischer, Henock Louis

Research output: Contribution to journalArticlepeer-review

17 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)1700-1714
Number of pages15
JournalManagement Science
Volume54
Issue number10
DOIs
StatePublished - Oct 2008

All Science Journal Classification (ASJC) codes

  • Strategy and Management
  • Management Science and Operations Research

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