They also thank Andrew Metrick for making the Governance Index and Blockholder Ownership datasets public, and Lucian Bebchuk for sharing his staggered board dataset.
The Influence of Takeover Protection on Earnings Management
Article first published online: 6 MAR 2008
© 2008 The Authors Journal compilation © 2008 Blackwell Publishing Ltd
Journal of Business Finance & Accounting
Volume 35, Issue 3-4, pages 347–375, April/May 2008
How to Cite
Zhao, Y. and Chen, K. H. (2008), The Influence of Takeover Protection on Earnings Management. Journal of Business Finance & Accounting, 35: 347–375. doi: 10.1111/j.1468-5957.2008.02081.x
- Issue published online: 6 MAR 2008
- Article first published online: 6 MAR 2008
- (Paper received March 2006, revised version accepted December 2007)
- takeover protection;
- earnings management;
- quiet life theory;
- corporate governance
Abstract: We examine the relationship between takeover protection and earnings management. Existing theories suggest two contradictory effects of takeover protection on opportunistic earnings management: entrenchment theory suggests an exacerbating effect, whereas both alignment theory and quiet life theory posit a mitigating effect. We find that takeover protection is associated with lower levels of abnormal working capital accruals, lower levels of performance-adjusted abnormal accruals and timelier recognition of losses. Further tests show that takeover protection is associated with lower firm value, which contradicts alignment theory but supports quiet life theory. The results suggest that takeover protection allows managers to enjoy the quiet life and thus mitigates earnings management.