Governance through exit: Pension fund reform impact on real earnings management of portfolio companies

Michał Kałdoński () and Tomasz Jewartowski ()
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Michał Kałdoński: Poznań University of Economics and Business
Tomasz Jewartowski: Poznań University of Economics and Business

Review of Quantitative Finance and Accounting, 2024, vol. 63, issue 4, No 7, 1349-1389

Abstract: Abstract Theoretical models predict that the threat of outside blockholder exit can mitigate agency problems and force managers to undertake actions that would maximize firm value in the long run. We examine whether the institutional blockholder exit threat curbs managerial misbehavior and short-termism reflected in real earnings management. Our study exploits a natural experiment—the Polish pension fund reform of 2013 that encouraged pension funds to trade more actively and imposed a real threat of exit on their portfolio companies. Using a difference-in-differences approach, we provide evidence that the reform significantly decreased the level of real earnings management in “treated” companies, that is, companies with open-ended pension funds (OFEs) playing the role of blockholders. The effect was more significant for firms in a multiple blockholder setting, firms under common ownership, and firms with higher insider’s stakes. Moreover, we confirmed that treated companies that decreased real earnings management in the post-reform period experienced the increased long-term operating performance.

Keywords: Corporate governance; Exit threat; Real earnings management; Blockholders; Institutional investors; Pension funds (search for similar items in EconPapers)
JEL-codes: G23 G30 G32 G34 G35 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11156-024-01294-0

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