Corporate takeover susceptibility and classification shifting
Abstract
Purpose
This paper examines the effect of firms’ takeover susceptibility on the manipulation of financial statements through classification shifting.
Design/methodology/approach
The paper applies ordinary least squares regression (OLS) with fixed effects analyses to a sample of United States listed firms over the period 1992–2014. We use takeover index as a proxy for takeover susceptibility of firms, with high values representing higher takeover susceptibility and lower values representing lower takeover susceptibility.
Findings
The study finds that firms engage in classification shifting through core expenses, suggesting that takeover threats reduce the incentive to manage earnings through classification shifting. We also find that takeover susceptibility improves the monitoring mechanism for firms with low profitability because these firms have greater incentives to engage in classification shifting. Finally, we find that the Sarbanes–Oxley Act strengthens the monitoring mechanism influenced by takeover threats. Overall, the results provide evidence of the important role of takeover susceptibility in mitigating classification shifting. Our results are robust to a battery of sensitivity tests.
Practical implications
The results emphasise the disciplinary role of the legal environment around corporate takeovers. The study suggests that policymakers and regulators should be cognisant of antitakeover laws which may increase agency conflicts between managers and shareholders and promote managerial self-seeking behaviours such as classification shifting.
Originality/value
The paper highlights the important role of takeover threats as an external governance mechanism to mitigate classification shifting which is detrimental to investors’ value. From prior literature, this study is the first to provide evidence of the effect of takeover threats on classification shifting.
Keywords
Acknowledgements
The authors would like to thank the anonymous reviewers and the Editor, Professor Alfred Yawson, for their helpful comments.
Funding: This research did not receive any specific grant from funding agencies in the public, commercial or not-for-profit sectors.
Disclosure statement: No potential conflict of interest was reported by the authors.
Citation
Zudana, A. and Opare, S. (2024), "Corporate takeover susceptibility and classification shifting", International Journal of Managerial Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJMF-11-2022-0478
Publisher
:Emerald Publishing Limited
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