Takeover Threats, Job Security Concerns, and Earnings Management
The Accounting Review, forthcoming
51 Pages Posted: 12 Sep 2017 Last revised: 20 Feb 2024
Date Written: November 21, 2023
Abstract
Using the staggered adoption of takeover laws, this study examines implications of takeover threats on earnings management around the world. I find that the enactment of takeover legislation leads to increased earnings management (abnormally high accruals, target beating, and poor accruals quality). Results are driven by underperforming managers with higher turnover risk in countries with high increases in turnover sensitivity to performance, indicating job security concerns as the channel through which takeover laws increase earnings management. Furthermore, results are strongest in countries with weak investor protection, where existing governance mechanisms are weaker and earnings management more prevalent. Moreover, regulation provisions which most directly increase takeover threats experience greater earnings management responses. Additionally, I show that accounting restatements and fraud scandals become more frequent following takeover legislation. Overall, I provide evidence that takeover reforms, while enhancing discipline of underperforming managers, inadvertently incentivize accounting manipulation due to heightened job security concerns.
Keywords: Takeovers, Takeover Laws, Job Security, Turnover Sensitivity to Performance, Earnings Management, Transparency
JEL Classification: M41, M51, G34, G38, K33
Suggested Citation: Suggested Citation