Private ownership is gaining ground again across Europe as companies seek more control and relief from the pressures of public markets. Before delisting, however, managers often adjust reported earnings, sometimes to make the company appear less expensive or to smooth the path for a buyout. Yet once these plans become public, markets often respond favorably, viewing the move as a signal of future value.
This shift toward going private began after the tech bubble burst in the early 2000s and accelerated following the 2008 financial crisis, as firms sought greater control and flexibility outside public markets. The expansion of private equity firms has reinforced the trend, offering new avenues to restructure and raise capital away from the glare of public disclosure. In Europe, where ownership is often concentrated, voluntary delistings through leveraged buyouts (LBOs), management buyouts (MBOs), or minority freeze-outs have become common.
In this post, I share insights from my analysis of 526 European firms from 2005 to 2023. My goal was to understand how managers manage earnings in the year before these delistings and how markets react once those plans become public. This research, supervised by Wouter Creemers, PhD, CFA, won third prize in the 2024 CFA Society Belgium’s Master Thesis Awards.
Earnings Management Before the Exit
As voluntary delistings become more common in Europe, attention has turned to how managers handle earnings before these transactions. Accounting standards such as IFRS and US GAAP allow a degree of discretion, giving managers flexibility to influence reported results through accounting choices or real business decisions.
This flexibility can make a firm’s performance appear better or worse than it really is, influencing decisions and contracts that depend on financial reports. When these actions comply with accounting standards and reflect genuine business activity, they are not fraudulent and can serve as a tool in corporate restructuring.
Managers often engage in downward earnings management before voluntary delistings. In LBOs, lowering reported earnings can help reduce the takeover price, while in MBOs, it can secure a more favorable buyout price for managers themselves. In both cases, earnings management acts as a strategic tool, helping make delistings cheaper and smoother.
The key questions, then, are whether managers in Europe manage earnings downward before voluntary delistings and whether markets recognize it before or around the announcement.
Findings and Market Reactions
My study examines 526 European firms — half that voluntarily delisted and half that remained public — using accounting and market data from 2005 to 2023. Abnormal current accruals were estimated following the DeFond and Park (2001) model to measure earnings management. An event study using stock prices measured cumulative abnormal returns (CARs) before and around each announcement date. T-tests and ordinary least squares regressions were then run to test the hypotheses.
The results reveal clear patterns in firms’ behavior before delisting announcements:
Firms manage earnings downward using negative abnormal current accruals in the year prior to the voluntary delistings via LBOs and MBOs. This pattern suggests managers may intentionally report lower earnings to support a lower deal price.
These firms experience positive cumulative abnormal returns around the delisting announcement date, suggesting favorable market reactions to the voluntary delisting decision. For voluntarily delisting European firms via LBOs and MBOs, downward earnings management in the year prior to the delistings is influenced by the voluntary delisting decisions as well as firms’ ROA ratio, D/E ratio, age up until delisting, growth in revenue, MTB ratio, and the delisting years. In practice, stakeholders should factor in the influence these factors have on financial reporting practices to make better informed strategic decisions.
Although consistent with prior research overall, this study did not find significant downward movements in stock prices before the announcements.
Implications for Investors and Policymakers
The results suggest several practical implications. Stakeholders should consider how voluntary delisting decisions affect financial reporting practices before announcements, to make more informed strategic decisions and better assess the reliability of financial statements.
While the earnings management observed here, whether through accounting choices allowed under IFRS or real activity adjustments, is not illegal, it still reflects opportunistic managerial behavior in firms preparing to delist.
Regulators may wish to strengthen disclosure standards to ensure financial reports more accurately reflect firms’ performance before delisting. Financial analysts and advisors can incorporate the impact of the delisting decisions on earnings management into their evaluations and client recommendations.
Most previous studies on earnings management prior to voluntary delistings focus on the United States and the United Kingdom. By examining European firms, this research broadens the geographical scope of the literature and enhances the relevance of findings on earnings management. The analysis integrates perspectives from accounting, corporate finance, corporate governance, and law to provide a more comprehensive view of earnings management.
Taken together, the findings highlight how managerial decisions shape financial reporting and market reactions in European voluntary delistings, offering both a broader understanding of earnings management and practical insights for investors and regulators.
References
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