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Real earnings manipulation surrounding mergers and acquisitions: the targets’ perspective

Real earnings manipulation surrounding mergers and acquisitions: the targets’ perspective This paper aims to investigate whether UK public targets manage their earnings using real activities manipulation in the period prior to the announcement of a mergers and acquisition (M&A). It also examines whether the payment method in M&As affects the degree to which takeover targets manipulate earnings.Design/methodology/approachUsing a sample of 131 UK listed targets acquired over the period 1995–2013, this paper examines real earnings management (REM) by employing OLS regression models. The data related to deals have been mainly collected from Thomson One Banker and Thomson Reuters Eikon databases. REM is examined by investigating abnormal cash flow from operations, abnormal discretionary expenses and abnormal production costs. This analysis was supplemented by conducting additional robustness checks.FindingsThe results show that UK takeover targets manage earnings upwards through cutting discretionary expenses in the year prior to the acquisition, while they do not do so by manipulating sales or production costs. Moreover, targets of cash-only or mixed-payment deals do not have the same strong motivation to manage their earnings as stock-financed deal target counterparts do. Our results continue to hold after using alternative accrual earnings management (EM) measures, controlling for unobservable firm heterogeneity using the fixed-effect model and controlling for endogeneity using the two-stage Heckman (1979) model.Practical implicationsThe main findings of this study could be beneficial for various parties involved M&As, such as standard setters and regulators. A need arises to improve disclosure rules and enhance overall financial reporting quality in the capital markets with the aim of reducing information asymmetry and agency conflicts.Originality/valueAs far as the literature on EM around M&As is concerned, only EM by acquirers has been examined, and not much attention has been paid to targets’ EM. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Accounting and Information Management Emerald Publishing

Real earnings manipulation surrounding mergers and acquisitions: the targets’ perspective

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References (126)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1834-7649
DOI
10.1108/ijaim-11-2020-0188
Publisher site
See Article on Publisher Site

Abstract

This paper aims to investigate whether UK public targets manage their earnings using real activities manipulation in the period prior to the announcement of a mergers and acquisition (M&A). It also examines whether the payment method in M&As affects the degree to which takeover targets manipulate earnings.Design/methodology/approachUsing a sample of 131 UK listed targets acquired over the period 1995–2013, this paper examines real earnings management (REM) by employing OLS regression models. The data related to deals have been mainly collected from Thomson One Banker and Thomson Reuters Eikon databases. REM is examined by investigating abnormal cash flow from operations, abnormal discretionary expenses and abnormal production costs. This analysis was supplemented by conducting additional robustness checks.FindingsThe results show that UK takeover targets manage earnings upwards through cutting discretionary expenses in the year prior to the acquisition, while they do not do so by manipulating sales or production costs. Moreover, targets of cash-only or mixed-payment deals do not have the same strong motivation to manage their earnings as stock-financed deal target counterparts do. Our results continue to hold after using alternative accrual earnings management (EM) measures, controlling for unobservable firm heterogeneity using the fixed-effect model and controlling for endogeneity using the two-stage Heckman (1979) model.Practical implicationsThe main findings of this study could be beneficial for various parties involved M&As, such as standard setters and regulators. A need arises to improve disclosure rules and enhance overall financial reporting quality in the capital markets with the aim of reducing information asymmetry and agency conflicts.Originality/valueAs far as the literature on EM around M&As is concerned, only EM by acquirers has been examined, and not much attention has been paid to targets’ EM.

Journal

International Journal of Accounting and Information Management – Emerald Publishing

Published: Aug 3, 2021

Keywords: Mergers and acquisitions; Real earnings management; Cash-only deals; Mixed-payment deals; Stock-financed deals

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