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

Lookup NU author(s): Dr Yousry Ahmed

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This is the authors' accepted manuscript of an article that has been published in its final definitive form by Emerald, 2021.

For re-use rights please refer to the publisher's terms and conditions.


Abstract

Purpose: This paper investigates whether UK public targets manage their earnings using real activities manipulation in the period prior to the announcement of a merger 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/approach: Using 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. Real earnings management 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. Findings: The 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 measures, controlling for unobservable firm heterogeneity using the fixed-effect model, and controlling for endogeneity using the two-stage Heckman (1979) model. Originality: As far as the literature on earnings management (EM) around M&As is concerned, only accruals earnings management by acquirers has been examined, and not much attention has been paid to targets’ EM. Practical implications: The 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.


Publication metadata

Author(s): Elrazaz T, Elmassri M, Ahmed Y

Publication type: Article

Publication status: Published

Journal: International Journal of Accounting & Information Management

Year: 2021

Volume: 29

Issue: 4

Pages: 429-451

Print publication date: 03/08/2021

Online publication date: 08/06/2021

Acceptance date: 10/03/2021

Date deposited: 08/04/2021

ISSN (electronic): 1834-7649

Publisher: Emerald

URL: https://doi.org/10.1108/IJAIM-11-2020-0188

DOI: 10.1108/IJAIM-11-2020-0188

Notes: I have uploaded my impact during March. However, the paper status is still Embargo Pending.


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