Private ownership is experiencing a resurgence across Europe as companies seek autonomy and relief from the demands of public markets. In the period leading up to delisting, managers often manipulate reported earnings, either to present the company as less valuable or to facilitate buyouts. Upon public disclosure of these plans, the market typically reacts positively, interpreting the move as an indication of future value.
The trend towards privatization accelerated following the tech bubble collapse in the early 2000s and gained further momentum after the 2008 financial crisis. Many firms are choosing to go private to gain more control and flexibility, a shift supported by the rise of private equity firms that offer alternative pathways for restructuring and capital acquisition absent from public scrutiny. In Europe, voluntary delistings, often achieved through leveraged buyouts (LBOs) and management buyouts (MBOs), have become increasingly prevalent.
Insights derived from an analysis of 526 European companies from 2005 to 2023 reveal that managers commonly employ earnings management techniques in the year preceding voluntary delistings. Techniques such as reported low earnings can help reduce the purchase price in buyout scenarios. Market responses to these announcements exhibit favorable trends, with companies experiencing positive returns around the delisting announcement.
The findings suggest that earnings management prior to voluntary delistings, while compliant with accounting standards, illustrates a certain opportunistic behavior among managers. There are implications for investors and policymakers, highlighting the need for enhanced disclosure standards to ensure that financial reports reflect a firm’s true health prior to delisting.
Why this story matters:
- It highlights a significant trend in corporate governance and finance across Europe.
Key takeaway:
- Earnings management prior to delistings can shape market perceptions and influence corporate buyout strategies.
Opposing viewpoint:
- Some may argue that earnings management, even when compliant with regulations, raises ethical concerns and affects the integrity of financial reporting.
