The Influence of Takeover Protection on Earnings Management

Yijiang Zhao and Kung H. Chen

Journal of Business Finance & Accounting, 2008, vol. 35, issue 3‐4, 347-375

Abstract: 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.

Date: 2008
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https://doi.org/10.1111/j.1468-5957.2008.02081.x

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