Earnings management and performance of management buyouts

Lokman Tutuncu (Faculty of Economics and Administrative Sciences, Bulent Ecevit University, Zonguldak, Turkey)

Managerial Finance

ISSN: 0307-4358

Publication date: 28 February 2019

Abstract

Purpose

The purpose of this paper is to examine the effect of pre-acquisition earnings management on the performance of private firm management buyouts.

Design/methodology/approach

The study examines 291 UK private firms acquired by their managers between 2004 and 2012. Earnings management is investigated by means of cross-sectional discretionary accruals models, and estimated discretionary accruals are regressed on performance changes in the three years following acquisition.

Findings

Management buyouts of private firms are preceded by earnings overstatement and followed by performance deterioration. Private equity sponsored firms engage less in earnings management and remain more profitable than non-sponsored buyouts. Upward earnings managers cease to outperform industry after second post-buyout year, while aggressive earnings managers do not outperform industry at all. Discretionary total accruals are inversely associated with performance changes in the three years after buyout, and explain over 4 per cent of the changes in performance.

Research limitations/implications

Pertinent to the utilisation of private firms and their exemption from publishing cash flow statement, the study relies on accrual-based models for tests of earnings management.

Originality/value

The paper contributes to the mergers and acquisitions literature and value creation debate in buyouts by providing the first tests of earnings management and post-acquisition performance in private firm management buyouts.

Keywords

Citation

Tutuncu, L. (2019), "Earnings management and performance of management buyouts", Managerial Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/MF-01-2018-0007

Download as .RIS

Publisher

:

Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

Please note you might not have access to this content

You may be able to access this content by login via Shibboleth, Open Athens or with your Emerald account.
If you would like to contact us about accessing this content, click the button and fill out the form.