Do targets grab the cash in takeovers: The role of earnings management |
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| Affiliation: | 1. INSEEC Research Group, International University of Monaco, 2, Avenue Albert II, 98000, Monaco;2. School of Business, University of the Fraser Valley, 33844 King Rd., Abbotsford BC, V2S 7M8, Canada;1. Wesleyan University, 238 Church Street, Middletown, CT 06459, United States;2. University of California Berkeley Law School;1. School of Business, Independent University, Bangladesh, Bashundhara R/A, Dhaka 1229, Bangladesh;2. Department of Accounting, La Trobe University, Bundoora, Vic 3086, Australia;1. School of Accounting, UNSW Business School, University of New South Wales, Australia;2. Whitman School of Management, Syracuse University, United States;3. Lindner College of Business, University of Cincinnati, United States;4. School of Banking and Finance, UNSW Business School, University of New South Wales, Australia;1. Department of International Business, Tunghai University, Taiwan; Department of International Business, National Taiwan University, Taiwan;2. Finance Discipline, College of Management, Innovation Center for Big Data and Digital Convergence, Yuan Ze University, Taiwan;3. Accounting Discipline, College of Management, Yuan Ze University, Taiwan |
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| Abstract: | Extant research on Mergers and Acquisitions (M&A) provides evidence that acquirers underperform subsequent to the takeover completion. Such evidence is more unequivocal for acquirers that finance the acquisition by issuing equity relative to those that use cash. Current literature recognizes various reasons for this underperformance, most of which suggest overvaluation of the acquirers and/or overpayment for the targets at the time of acquisition announcement. Alternatively, this paper aims to investigate whether acquirers' post-takeover abnormal return is also attributed to target firms' real and/or accrual earnings management. Our results indicate that, on average, targets manage earnings upwards using real transactions rather than accruals, during the year preceding the takeover. More specifically, we find evidence of earnings management through sales among targets of cash acquisitions and that it is significantly and negatively related to the post-acquisition performance of the acquirers. These findings suggest that there is an association between the method of financing in acquisitions and earnings management in target firms, which could impact the post-takeover performance of acquirers. |
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