Does the Monitoring Role of Buyout Houses Improve Discretionary Accruals Quality?

Abstract

Using a sample of reverse leveraged buyout (‘reverse-LBO’) firms, I find that discretionary accruals quality (AQ), the quality of accruals that are subject to management discretion, significantly improves from pre-LBO to post-reverse LBO. Moreover, buyout houses’ board seats and the length of firms’ stay-in-private periods are significant explanatory variables for the cross-sectional variation in discretionary AQ for post-reverse-LBO firms. My findings suggest that the monitoring provided by private equity buyout houses improves discretionary AQ, consistent with the view of Jensen (1989a,b) that LBOs are a solution to inefficiencies that arise from agency problems.