GEX Management Inc (GXXM)

[StockRoomBully]

DONT BE NAIVE. Why pps so low?

"DDo Managers Manipulate Earnings
Prior to Management Buyouts?

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1. Introduction
Prior to management buyouts (MBOs), managers have an incentive to deflate the reported
earnings numbers by accounting manipulation in the hope of lowering the subsequent stock
price. If they succeed, they will be able to acquire (a large part of) the company on the cheap.
It is important to note that accounting manipulation in a buyout transaction may have severe
consequences for the shareholders who sell out in the transaction: if the earnings distortion is
reflected in the stock price, the stock price decline cannot be undone and the wealth loss of
shareholders is irreversible if the company goes private subsequent to the buyout. Mispriced
stock and false financial statements are still issues frequently mentioned when MBO
transactions are evaluated. The UK’s Financial Services Authority (FSA, 2006) ranks market
abuse as one of the highest risks and suggests more intensive supervision of leveraged
buyouts (LBOs). The concerns about mispriced buyouts are therefore a motive to test
empirically whether earnings numbers are manipulated preceding buyout transactions.
Whereas the manipulation of financial statements prior to US MBOs has occasionally been