An Empirical Analysis of Corporate Takeover Defenses and Earnings Management: Evidence from the U.S.

This study explores the impact of corporate takeover defences on the extent of earnings management in the US. Theoretically, it is not obvious whether takeover defences alleviate or exacerbate earnings management. Four well-known corporate takeover defences are examimed: blank check preferred stock, poison pills, classified boards and dual class stock. In spite of their similarity as takeover defences, the empirical evidence indicates that they do not influence the degree of earnings management in the same way. Specifically, blank check preferred stock does not have a significant impact on earnings management. Poison pills and classified boards are found to reduce earnings management, on average, by 1.9% and 1.5% respectively. On the contrary, dual class stock exacerbates earnings management by increasing the degree of abnormal accruals by 2.6% on average. The results are robust even after controlling for firm size, profitability, financial distress, growth opportunities and information asymmetry.