Earnings Management and Stock Performance of Reverse Leveraged Buyouts

This study provides further evidence of earnings management around security offerings. We find positive and significant discretionary current accruals coincident with offerings of reverse LBOs. Issuers in the most quot;aggressivequot; quartile of earnings management have a one-year aftermarket return that is between 15 percent and 25 percent less than the most quot;conservativequot; quartile. We also find a negative and significant relation between abnormal accruals and post-issue abnormal returns within the first year after the offering. The relation remains even after controlling for book-to-market ratio, firm size, offering size and involvement of buyout specialists or management. Although earnings management has been used to explain post-issue long-term underperformance of IPOs and SEOs, our study shows that earnings management can explain post-offering returns of reverse LBOs, even in the absence of post-offering underperformance