Table of Contents:
Shifts in corporate ownership in Europe
The landscape of corporate ownership in Europe has transformed, with many companies pursuing private ownership. This shift is fueled by management’s desire for greater control and relief from the pressures of public markets. Before delisting, companies often engage in practices that adjust reported earnings, making them appear more appealing for potential buyouts. Market reactions to news of privatization often reflect optimism, viewing these moves as indicators of future value.
The trend toward privatization accelerated following the tech bubble burst in the early 2000s and gained momentum after the 2008 financial crisis. Companies sought more operational flexibility away from public scrutiny. The rise of private equity firms has supported this shift by offering avenues for restructuring and capital acquisition without public disclosure. In Europe, where ownership is frequently centralized, methods such as leveraged buyouts (LBOs), management buyouts (MBOs), and minority freeze-outs have gained prominence.
Understanding earnings management before delisting
This article presents findings from an analysis of 526 European firms between 2005 and. The goal was to assess how management manipulates earnings in the year leading up to voluntary delistings and to evaluate market reactions when these strategies are revealed. This research, led by Wouter Creemers, PhD, CFA, received recognition at the CFA Society Belgium’s Master Thesis Awards.
As voluntary delistings increase in Europe, examining the tactics employed by managers to manage earnings prior to these transactions becomes essential. Accounting frameworks such as IFRS and US GAAP provide managers with discretion, allowing for the manipulation of reported results through accounting choices or operational decisions. Such flexibility can distort a firm’s actual performance, impacting decisions reliant on financial disclosures.
Downward earnings management as a strategy
A notable trend is the prevalence of downward earnings management leading up to voluntary delistings. In the context of LBOs, reducing reported earnings can lower the acquisition price. In MBOs, it may secure a more favorable deal for the management team. Thus, earnings management acts as a strategic approach to facilitate a smoother and less expensive delisting process.
Market perceptions and implications for stakeholders
This context raises critical questions: Do managers in Europe engage in downward earnings management prior to voluntary delistings? How do markets react to these actions upon their announcement? The study examined both firms that opted to delist and those that remained publicly traded, utilizing accounting and market data from 2005 to.
To quantify earnings management, the DeFond and Park (2001) model was applied to estimate abnormal current accruals. An event study methodology analyzed cumulative abnormal returns (CARs) surrounding each announcement date. T-tests and ordinary least squares regressions were conducted to validate the hypotheses.
The results revealed distinct behavioral patterns among firms prior to delisting announcements. While findings aligned with existing research, no significant declines in stock prices were observed before these announcements. This suggests stakeholders should consider the implications of voluntary delisting decisions on financial reporting practices, enabling more informed strategic choices.
Regulatory considerations and the future of financial reporting
Although the earnings management strategies identified—whether through permissible accounting practices or genuine business adjustments—do not constitute fraud, they indicate opportunistic behavior among managers preparing for delisting. Regulatory bodies may consider enhancing disclosure requirements to ensure financial reports accurately reflect a firm’s performance before delisting.
Financial analysts and advisors can also integrate the impact of delisting decisions on earnings management into their evaluations and recommendations. Previous studies primarily focused on earnings management in the United States and the United Kingdom. This research expands the geographical scope of the literature, enriching the understanding of earnings management within the European context. By incorporating perspectives from accounting, corporate finance, governance, and legal frameworks, this analysis provides a comprehensive view of earnings management.
The trend toward privatization accelerated following the tech bubble burst in the early 2000s and gained momentum after the 2008 financial crisis. Companies sought more operational flexibility away from public scrutiny. The rise of private equity firms has supported this shift by offering avenues for restructuring and capital acquisition without public disclosure. In Europe, where ownership is frequently centralized, methods such as leveraged buyouts (LBOs), management buyouts (MBOs), and minority freeze-outs have gained prominence.0
