Spin-offs involve a quotation on the Financial market. So something like an IPO takes place. At the same moment a change of CEO and a change of board of directors structure may happen. So do you have any information concerning a potential real management of earnings that may take place before and after the spin-off (Papers,...).?
Prima facie the deal structuring clouds the resulting 2 financial statements as both firms share restructuring costs and the ratio of split between the parent and the split company is likely to avoid further need/possibilities of active earnings management
An excellent question for which there seems to be no authoritative answers. We would expect that preceding a spin-off, an IPO or any sale of a business there will be grooming of the accounts in order to attract the best price.
Does such activity continue afterwards. Empirical evidence suggests that for IPOs the returns decline and share prices fall for 2-5 years post listing.
If we believe the same will be true of spin-offs then this suggests that the earnings management will be reasonably quickly be earnings non-management and that the earnings will be more reflective of the underlying economics of the entity.
At what speed will this happen is likely to vary depending on block share holdings, industry, legal and regulatory framework.
I think it is an interesting study to conduct across a range of countries.
Thank you very much Stuart for your cautious and interesting answer. I think that your proposal of an international study after the spin-off is valuable. As for me, I was wondering if the fact that a new CEO was hired in the spun off firm, was not enhancing the probability of further earnings manipulation?.
Dear Professors;
Dear Professor Patrick;
According to Huang et al. (2012), a long CEO tenure increases his rooting, and therefore, he becomes more consist about the situation of the firm. Ali and Zhan (2015) found that earnings overstated behavior is more likely to be in the early years of CEOs’ service. This finding has been explained by the fact that in the first years of CEO's service, the manager has an incentive to inflate the earnings in order to influence the market about his qualifications. Ali and Zhan (2015) argue that, after building his reputation, the manager will avoid the earnings overstatement, which if detected, could damage his reputation.
We have meet dear professor during the TSFS conference in Tunisia last year, and I am really happy to follow your research.
All the best
Thanks you for your answer Souhir Neifar. It is true that the CEO's reputation is a valuable asset and that he/she wants to preserve it as long as possible.
All the best to you and to the TSFS conference !.
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