Personal possession is gaining floor once more throughout Europe as corporations search extra management and aid from the pressures of public markets. Earlier than delisting, nevertheless, managers usually modify reported earnings, typically to make the corporate seem cheaper or to clean the trail for a buyout. But as soon as these plans turn out to be public, markets usually reply favorably, viewing the transfer as a sign of future worth.
This shift towards going non-public started after the tech bubble burst within the early 2000s and accelerated following the 2008 monetary disaster, as corporations sought larger management and suppleness exterior public markets. The enlargement of personal fairness corporations has strengthened the pattern, providing new avenues to restructure and lift capital away from the glare of public disclosure. In Europe, the place possession is usually concentrated, voluntary delistings via leveraged buyouts (LBOs), administration buyouts (MBOs), or minority freeze-outs have turn out to be widespread.
On this put up, I share insights from my evaluation of 526 European corporations from 2005 to 2023. My purpose was to know how managers handle earnings within the 12 months earlier than these delistings and the way markets react as soon as these plans turn out to be public. This analysis, supervised by Wouter Creemers, PhD, CFA, gained third prize within the 2024 CFA Society Belgium’s Grasp Thesis Awards.
Earnings Administration Earlier than the Exit
As voluntary delistings turn out to be extra widespread in Europe, consideration has turned to how managers deal with earnings earlier than these transactions. Accounting requirements comparable to IFRS and US GAAP permit a level of discretion, giving managers flexibility to affect reported outcomes via accounting decisions or actual enterprise selections.
This flexibility could make a agency’s efficiency seem higher or worse than it truly is, influencing selections and contracts that rely on monetary stories. When these actions adjust to accounting requirements and mirror real enterprise exercise, they aren’t fraudulent and may function a device in company restructuring.
Managers usually have interaction in downward earnings administration earlier than voluntary delistings. In LBOs, decreasing reported earnings can assist cut back the takeover value, whereas in MBOs, it will probably safe a extra favorable buyout value for managers themselves. In each circumstances, earnings administration acts as a strategic device, serving to make delistings cheaper and smoother.
The important thing questions, then, are whether or not managers in Europe handle earnings downward earlier than voluntary delistings and whether or not markets acknowledge it earlier than or across the announcement.
Findings and Market Reactions
My research examines 526 European corporations — half that voluntarily delisted and half that remained public — utilizing accounting and market knowledge from 2005 to 2023. Irregular present accruals had been estimated following the DeFond and Park (2001) mannequin to measure earnings administration. An occasion research utilizing inventory costs measured cumulative irregular returns (CARs) earlier than and round every announcement date. T-tests and abnormal least squares regressions had been then run to check the hypotheses.
The outcomes reveal clear patterns in corporations’ habits earlier than delisting bulletins:
- Companies handle earnings downward utilizing adverse irregular present accruals within the 12 months previous to the voluntary delistings through LBOs and MBOs. This sample suggests managers could deliberately report decrease earnings to help a decrease deal value.
- These corporations expertise optimistic cumulative irregular returns across the delisting announcement date, suggesting favorable market reactions to the voluntary delisting determination. For voluntarily delisting European corporations through LBOs and MBOs, downward earnings administration within the 12 months previous to the delistings is influenced by the voluntary delisting selections in addition to corporations’ ROA ratio, D/E ratio, age up till delisting, development in income, MTB ratio, and the delisting years. In apply, stakeholders ought to issue within the affect these components have on monetary reporting practices to make higher knowledgeable strategic selections.
Though in keeping with prior analysis total, this research didn’t discover important downward actions in inventory costs earlier than the bulletins.
Implications for Buyers and Policymakers
The outcomes counsel a number of sensible implications. Stakeholders ought to take into account how voluntary delisting selections have an effect on monetary reporting practices earlier than bulletins, to make extra knowledgeable strategic selections and higher assess the reliability of monetary statements.
Whereas the earnings administration noticed right here, whether or not via accounting decisions allowed underneath IFRS or actual exercise changes, just isn’t unlawful, it nonetheless displays opportunistic managerial habits in corporations making ready to delist.
Regulators could want to strengthen disclosure requirements to make sure monetary stories extra precisely mirror corporations’ efficiency earlier than delisting. Monetary analysts and advisors can incorporate the affect of the delisting selections on earnings administration into their evaluations and shopper suggestions.
Most earlier research on earnings administration previous to voluntary delistings deal with america and the UK. By analyzing European corporations, this analysis broadens the geographical scope of the literature and enhances the relevance of findings on earnings administration. The evaluation integrates views from accounting, company finance, company governance, and legislation to supply a extra complete view of earnings administration.
Taken collectively, the findings spotlight how managerial selections form monetary reporting and market reactions in European voluntary delistings, providing each a broader understanding of earnings administration and sensible insights for traders and regulators.
References
Achleitner, A., Betzer, A., Goergen, M., & Hinterramskogler, B. (2013). Personal fairness acquisitions of continental European corporations: The affect of possession and management on the probability of being taken non-public. European Monetary Administration, 19(1), 72-107. https://doi.org/10.1111/j.1468-036X.2010.00569.x
Christensen, T. E., Huffman, A., Lewis-Western, M. F., & Scott, R. (2022). Accruals earnings administration proxies: Prudent enterprise selections or earnings manipulation? Journal of Enterprise Finance & Accounting, 49(3-4), 536-587. https://doi.org/10.1111/jbfa.12585
DeFond, M. L., & Park, C. W. (2001). The reversal of irregular accruals and the market valuation of earnings surprises. The Accounting Overview, 76(3), 375-404. https://doi.org/10.2308/accr.2001.76.3.375
Fontana, S., Coluccia, D., & Solimene, S. (2019). VAIC as a device for measuring intangibles worth in voluntary multi-stakeholder disclosure. Journal of the Data Economic system,10(4), 1679-1699. https://doi.org/10.1007/s13132-018-0526-0
Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The financial implications of company monetary reporting. Journal of Accounting and Economics, 40(1-3), 3-73. https://doi.org/10.1016/j.jacceco.2005.01.002
Healy, P. M., & Wahlen, J. M. (1999). A evaluate of the earnings administration literature and its implications for normal setting. Accounting Horizons, 13(4), 365-383. https://doi.org/10.2308/acch.1999.13.4.365
Lerner, J. (2011). The way forward for non-public fairness. European Monetary Administration, 17(3), 423-435. https://doi.org/10.1111/j.1468-036X.2010.00589.x
Leuz, C., Triantis, A. J., & Wang, T. Y. (2008). Why do corporations go darkish? Causes and financial penalties of voluntary SEC deregistrations. Journal of Accounting and Economics, 45(2-3), 181-208. https://doi.org/10.1016/j.jacceco.2008.01.001
Magni, D., Morresi, O., Pezzi, A., & Graziano, D. (2022). Defining the connection between agency’s efficiency and delisting: Empirical proof of going non-public in Europe. Journal of the Data Economic system, 13(3), 2584-2605. https://doi.org/10.1007/s13132-021-00806-w
Martinez, I., & Serve, S. (2011). The delisting determination: The case of buyout supply with squeeze-out (BOSO). Worldwide Overview of Regulation and Economics, 31(4), 228-239. https://doi.org/10.1016/j.irle.2011.07.001
Matsuura, S. (2008). On the relation between actual earnings administration and accounting earnings administration: Revenue smoothing perspective. Journal of Worldwide Enterprise Analysis, 7(3), 63-77.
Perry, S. E., & Williams, T. H. (1994). Earnings administration previous administration buyout presents. Journal of Accounting and Economics, 18(2), 157-179. https://doi.org/10.1016/0165-4101(94)00362-9
Thomsen, S., & Vinten, F. (2014). Delistings and the prices of governance: A research of European inventory exchanges 1996-2004. Journal of Administration and Governance, 18(3), 793-833. https://doi.org/10.1007/s10997-013-9256-7
