Earnings Management - MBO副本
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Transcript of Earnings Management - MBO副本
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Paper One
Earnings ManagementBuyout Offer
Susan E. Perry , Thomas H. Williams
Earnings ManagementPreceding Management Buyout
Offer
JCCarol
TommyLiana
Joana Carla Mamauag ClarusIao Tong TongLin MaizheCao Jingya
B-B1-0015-1B-B1-0352-3B-B1-0111-2B-B2-0461-3
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What is Management Buyout?
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Earnings ManagementBuyout Offer
• Form of leveraged buy-out
• Company’s existing management team acquires a large part of the company
• Preferred exit strategy by large firms that intend to close or divest
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Example of MBO – Virgin
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Virgin Wines
Earnings ManagementBuyout Offer
• Virgin Wines’ UK business has been bought out by management as former owner Direct Wines focuses on overseas expansion
• Management team is backed by private equity funds
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Earnings ManagementBuyout Offer
Problem?Agency Problem
• Fiduciary duty: legal duty to seek best possible price for the firm
• Self-Interest: personal motivation to seek favorable purchase price
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Literature – DeAngelo (1986)• Sample: 64 New York and American Stock Exhange companies with
MBO proposals (1973-1982)
• Used discretionary accruals to test understated earnings in period before buyout
• Proxy for discretionary accruals is change in total accruals• H0: Δ total accruals = 0 • H1: Δ total accruals > 0
• Result did not support earnings management hypothesis
• Reason: Detailed scrutiny accompanied MBO
Earnings ManagementBuyout Offer
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Literature – DeAngelo (1986)• Sample
• Too small• Large number of troubled firms• ‘Second-Offer’ firms
• Model• Assumed change in non-discretionary is 0• Does not consider firm’s economic activity in
hypothesized manipulation year (Jones, 1991)
Earnings ManagementBuyout Offer
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Problem
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Earnings ManagementBuyout Offer
How Do They Improve on Methodology? • More restrict criteria
• Larger sample : 175 companies ( including 96 regional and OTC companies)
• More specific period : 1981-1988
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Test Sample Group
Methodology
Control Sample Group
Individually Match
Compare
Difference
• Test Sample Group : company had management buyout (MBO) proposals• Control Sample Group : company that don’t have MBO proposals
Earnings ManagementBuyout Offer
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Earnings ManagementBuyout Offer
Methodology8
CONCERNThe different generated is not caused by manipulation of earnings management but external factors
SOLUTIONControl sample group chosen base on two criteria
• Industry (proxied by SIC)• Size (proxied by sales)
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Earnings ManagementBuyout Offer
Methodology8
• Example• External factors : competition, political environment,
legal change etc.
• Reason of using two criterias• Matched companies : same industry & similar size —>
affected by similar external factors• Have comparable operating, investing, and financing
opportunity sets• Have comparable voluntary accounting choice sets
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Earnings ManagementBuyout Offer
T-test for Paired Samples8
• Null hypothesis : mean difference = 0
• Industry : • 60% (105 companies) match on four-digit SIC codes• 14% (25 companies) match on three-digit SIC codes• 26% (45 companies) match on two-digit SIC code• conclude : two groups of companies are similar with
industry
• Size : Table 2
910
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Earnings ManagementBuyout Offer
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• conclude : two groups of companies are similar with size
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T-test for Paired Samples11
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Earnings ManagementBuyout Offer
Detect Earnings Management
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Abnormal accruals= Total accruals – Expected accruals
Total Accruals = change in noncash working capital – depreciation expense
912
Net income – Operating Cash Flow
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Earnings ManagementBuyout Offer
8913
Expected Accruals :
Abnormal Accruals :
Adjusts for non-discretionary changes in working capital accounts
Adjusts for non-discretionary depreciation expense
Detect Earnings Management
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Earnings ManagementBuyout Offer
8914
Detect Earnings Management
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Earnings ManagementBuyout Offer
Discussion of Results8915
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Earnings ManagementBuyout Offer
Discussion of Results8916
Standardize each abnormal returnVip = AAip / σ(Aaip)
Summarize all the 175 abnormal accrualsZip = Σ Vip / Σ√(Ti – 3)/(Ti-5)
Year -1 Year -2N Z P Z P
MBO 175 -4.010 0.000 -0.217 0.414
Control 175 -0.898 0.185 -0.363 0.358
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Earnings ManagementBuyout Offer
Discussion of Results8917
Strong evidence of earnings management
Political costsDebt-covenant Bonus plan
Management buyout
-0.898-4.010
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Earnings ManagementBuyout Offer
8919
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Earnings ManagementBuyout Offer
8920
Interest expense• $30,812 thousand dollars related to the Loss on
extinguishment of debt
• Retire 7.375% senior notes and notes due 2016 by 7.375% senior notes due 2021
• No cash effect
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Earnings ManagementBuyout Offer
8921
Goodwill impairment2012 2009
- Share price decrease
Incentive for impairment
- Bankruptcy of customers- Decline in revenue- Low growth rate
Incentive for impairment
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Earnings ManagementBuyout Offer
8922
April 30, 2012$15.29
Aug 2, 2012$12.22
Market is not efficient if assumption made is
correct
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Earnings ManagementBuyout Offer
SOX, SEC Rules & Listing Standards
Audit Committee• Independence (no personal or financial ties)
• Financially literate members
• Oversee the financial reporting and audit process
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Earnings ManagementBuyout Offer
SOX, SEC Rules & Listing StandardsManagement
• Management’s certification of financial report
• Statement of whether the buyout offer is fair to shareholders
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Earnings ManagementBuyout Offer
SOX, SEC Rules & Listing Standards
External Auditors• Creation of PCAOB to regulate auditing profession
• Restriction of performing other non-audit services
• Audit committee oversight of external auditors
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Earnings ManagementBuyout Offer
• The takeaway from our presentation is that earnings management prior management buyouts exist due to agency problem
• This problem cannot be fully eliminated but can further be restricted through better corporate governance
Conclusion
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Q & A
~Thanks for your attention~
Earnings ManagementBuyout Offer