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Paul Fischer, Chair of the Department of Accounting, and Henock Louis, Associate Professor of Accounting

Fischer and Louis analyze the effect of external financing concerns on managers' financial reporting behavior prior to management buyouts. Prior studies hypothesize that managers intending to undertake a buyout have an incentive to manage earnings downward to reduce the purchase price. Fischer and Louis find that managers also face a conflicting reporting incentive associated with their efforts to obtain external financing for the buyout and to lower their costs. Managers who rely more on external funds to finance their buyouts tend to report fewer negative abnormal accruals prior to buyouts. In addition, the relationship between external financing and abnormal accruals is tempered when there are more fixed assets that can serve as collateral for debt financing.