The Impact of Private Equity on Quality of Reporting and Acquisition Premiums in Management Buyouts

ABSTRACT Management buyouts (MBOs) often involve private equity (PE) firms that provide necessary financial support and expertise. Deeply underperforming firms that PE firms can see a clear path to fixing typically attract large premiums. However, marginally underperforming firms need to provide more information to PE investors to present as attractive targets. We examine the dynamics between PE and target management, providing analysis and evidence consistent with this argument. Our paper shows that, particularly in the latter case, PE involvement reduces targets' accrual earnings management and conservative accounting practices pre‐MBOs. Our study contributes to understanding the more subtle implications of PE engagement in the MBO market.