Non-public possession is gaining floor once more throughout Europe as firms search extra management and aid from the pressures of public markets. Earlier than delisting, nevertheless, managers usually alter reported earnings, typically to make the corporate seem inexpensive or to easy the trail for a buyout. But as soon as these plans turn out to be public, markets usually reply favorably, viewing the transfer as a sign of future worth.
This shift towards going personal started after the tech bubble burst within the early 2000s and accelerated following the 2008 monetary disaster, as companies sought better management and suppleness exterior public markets. The growth of personal fairness companies has bolstered the pattern, providing new avenues to restructure and lift capital away from the glare of public disclosure. In Europe, the place possession is commonly concentrated, voluntary delistings by means of leveraged buyouts (LBOs), administration buyouts (MBOs), or minority freeze-outs have turn out to be widespread.
On this submit, I share insights from my evaluation of 526 European companies from 2005 to 2023. My purpose was to know how managers handle earnings within the yr earlier than these delistings and the way markets react as soon as these plans turn out to be public. This analysis, supervised by Wouter Creemers, PhD, CFA, gained third prize within the 2024 CFA Society Belgium’s Grasp Thesis Awards.
Earnings Administration Earlier than the Exit
As voluntary delistings turn out to be extra widespread in Europe, consideration has turned to how managers deal with earnings earlier than these transactions. Accounting requirements comparable to IFRS and US GAAP enable a level of discretion, giving managers flexibility to affect reported outcomes by means of accounting decisions or actual enterprise selections.
This flexibility could make a agency’s efficiency seem higher or worse than it truly is, influencing selections and contracts that rely upon monetary reviews. When these actions adjust to accounting requirements and replicate real enterprise exercise, they don’t seem to be fraudulent and may function a software in company restructuring.
Managers usually have interaction in downward earnings administration earlier than voluntary delistings. In LBOs, reducing reported earnings may help cut back the takeover value, whereas in MBOs, it will possibly safe a extra favorable buyout value for managers themselves. In each circumstances, earnings administration acts as a strategic software, serving to make delistings cheaper and smoother.
The important thing questions, then, are whether or not managers in Europe handle earnings downward earlier than voluntary delistings and whether or not markets acknowledge it earlier than or across the announcement.
Findings and Market Reactions
My examine examines 526 European companies — half that voluntarily delisted and half that remained public — utilizing accounting and market information from 2005 to 2023. Irregular present accruals have been estimated following the DeFond and Park (2001) mannequin to measure earnings administration. An occasion examine utilizing inventory costs measured cumulative irregular returns (CARs) earlier than and round every announcement date. T-tests and peculiar least squares regressions have been then run to check the hypotheses.
The outcomes reveal clear patterns in companies’ habits earlier than delisting bulletins:
- Companies handle earnings downward utilizing unfavourable irregular present accruals within the yr previous to the voluntary delistings through LBOs and MBOs. This sample suggests managers might deliberately report decrease earnings to help a decrease deal value.
- These companies expertise optimistic cumulative irregular returns across the delisting announcement date, suggesting favorable market reactions to the voluntary delisting choice. For voluntarily delisting European companies through LBOs and MBOs, downward earnings administration within the yr previous to the delistings is influenced by the voluntary delisting selections in addition to companies’ ROA ratio, D/E ratio, age up till delisting, development in income, MTB ratio, and the delisting years. In follow, stakeholders ought to issue within the affect these elements have on monetary reporting practices to make higher knowledgeable strategic selections.
Though in keeping with prior analysis general, this examine didn’t discover vital downward actions in inventory costs earlier than the bulletins.
Implications for Buyers and Policymakers
The outcomes recommend a number of sensible implications. Stakeholders ought to take into account how voluntary delisting selections have an effect on monetary reporting practices earlier than bulletins, to make extra knowledgeable strategic selections and higher assess the reliability of economic statements.
Whereas the earnings administration noticed right here, whether or not by means of accounting decisions allowed underneath IFRS or actual exercise changes, will not be unlawful, it nonetheless displays opportunistic managerial habits in companies getting ready to delist.
Regulators might want to strengthen disclosure requirements to make sure monetary reviews extra precisely replicate companies’ efficiency earlier than delisting. Monetary analysts and advisors can incorporate the impression of the delisting selections on earnings administration into their evaluations and consumer suggestions.
Most earlier research on earnings administration previous to voluntary delistings give attention to the USA and the UK. By inspecting European companies, this analysis broadens the geographical scope of the literature and enhances the relevance of findings on earnings administration. The evaluation integrates views from accounting, company finance, company governance, and legislation to supply a extra complete view of earnings administration.
Taken collectively, the findings spotlight how managerial selections form monetary reporting and market reactions in European voluntary delistings, providing each a broader understanding of earnings administration and sensible insights for buyers and regulators.
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