Directors' Recommendations on Takeover Bids and the Management of Earnings: Evidence from Australian Takeovers

This article investigates whether Australian companies manage their earnings during takeover bids in a manner consistent with the earnings-management hypothesis. This hypothesis predicts that directors who reject a bid use accrual accounting to increase current earnings, supporting their claim that the bid, relative to earnings, is inadequate. Likewise, directors who accept a bid are predicted to use accrual accounting to decrease current earnings. Overall, the results are not consistent with the earnings-management hypothesis. However, some components of unexpected accruals (our proxy for managed earnings) change in the direction predicted by the earnings-management hypothesis, although these changes are not statistically significant. Using industry adjusted performance measures the conclusion is that unexpected accruals are primarily a manifestation of poor financial performance of target firms in the period leading up to the takeover bid.     

Executive Share Options: An Economic Framework

This paper provides an overview of the executive compensation debate with special emphasis on the role of executive share options. Widespread criticism of executive pay typically concentrates on pay levels, rather than the composition of executive pay and its determinants. The paper points out that gains from exercising executive share options are not simply rewards for the period in which they are realised and reported. The economic rationale for rewarding executives through share options is reviewed, leading to the conclusion that options are more likely to form a relatively important part of executive remuneration in organisations which face valuable, but relatively risky, investment opportunities. However, because options can aggravate conflicts of interest such as those that arise between shareholders and lenders, they are not a universally efficient form of executive compensation.