September 6, 2017

Activism: Study Says Targets More Likely to Withhold Bad News & Manage Earnings

Companies employ a variety of strategies in response to shareholder activism, but this “Institutional Investor” article says that, according to a new study, withholding negative forecasts & managing earnings sometimes play a part.  Here’s an excerpt:

When activist hedge funds intervene at portfolio companies, company managers often take defensive action.

Managers at these firms are likely to strategically change voluntary disclosure practices and earnings management strategies in order to protect against heightened career and reputational risks, according to forthcoming research in academic journal Management Science.

The study’s authors said companies embroiled in these types of battles become more likely to withhold bad news and use earnings management techniques to inflate their reported performance.  The research was based on a study of 510 companies targeted by 191 activist hedge funds, using data from U.S. regulatory financings and management earnings forecasts.

The study found that the practice of withholding bad news was more pronounced when hedge fund activists posed greater threats to management & where their interventions were short-term in nature.

John Jenkins