Earnings-reducing Activities before Management Buyouts

During the year prior to management buyout (MBOs) announcements, target firms exhibit abnormally high discretionary expenses in selling, general and administration, abnormally low discretionary accruals, and realize losses from asset sales. Higher discretionary expenses and losses from asset sales are associated with lower pre-MBO abnormal stock returns, especially for firms with higher insider ownership, less board and institutional monitoring, and higher information asymmetry. They are also associated with better post-MBO operating performance. None of these activities affects the likelihood of MBO deal completion, announcement period abnormal returns, or offer premium. These target firms do not show such abnormal activities in other years before the MBOs or after the MBOs. Our results suggest that outside investors and the market do not fully understand the earnings-reducing activities before MBOs