Does the Threat of Takeover Discipline Managers? New Evidence from the Foreign Investment and National Security Act

• In Event: Political Issues and Foreign Investment

Abstract

Competing theories and mixed results describe the effect of the takeover market on managers’ earnings management incentives. I use the passage of the Foreign Investment and National Security Act (FINSA), which suppressed foreign investment in a subset of U.S. industries, to re-examine this relationship. I find that, after FINSA implementation, FINSA-affected firms record more income-increasing discretionary accruals. Firms that were more likely to be subject to takeover before FINSA drive this effect. This inference is robust to a wide variety of empirical specifications and discretionary accrual measures as well as to the use of firm fixed effects, model-free measures of earnings management and multiple placebo tests. Overall, these results suggest that a weaker market for corporate control accentuates earnings management.

Author

• David Godsell, University of Illinois-Urbana-Champaign