Does the monitoring role of buyout houses improve discretionary accruals quality?
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Using a sample of reverse leveraged buyout (‘reverse-LBO’) firms, I find that discretionary accruals quality (AQ), the quality of accruals that are subject to management discretion, significantly improves from pre-LBO to post-reverse LBO. Moreover, buyout houses’ board seats and the length of firms’ stay-in-private periods are significant explanatory variables for the cross-sectional variation in discretionary AQ for post-reverse-LBO firms. My findings suggest that the monitoring provided by private equity buyout houses improves discretionary AQ, consistent with the view of Jensen (1989a,b) that LBOs are a solution to ineﬃciencies that arise from agency problems.
The article of record as published may be found at http://dx.doi.org/10.1111/j.1467-629X.2010.00351.x
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