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Earnings quality following corporate acquisitions

Charles A. Barragato (Long Island University – CW Post Campus, Brookville, New York, USA)
Ariel Markelevich (Long Island University – CW Post Campus, Brookville, New York, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 11 April 2008

Abstract

Purpose

The paper aims to examine earnings quality during the post‐acquisition period.

Design/methodology/approach

The paper defines earnings quality as an earnings stream more closely associated with future cash flows from operations. It uses the stock market's reaction at the acquisition announcement to infer merger motives and hypothesize that synergy‐motivated acquisitions will produce higher quality earnings than agency‐motivated acquisitions.

Findings

The paper finds that synergy‐motivated acquisitions produce higher quality earnings than agency‐motivated acquisitions.

Research limitations/implications (if applicable)

The findings are consistent with this prediction and support the view that managers who pursue synergy or agency‐motivated acquisitions do not face the same economic environment and incentive schemes. The results are also consistent with the notion that incentives for earnings management are greater following agency‐motivated acquisitions when compared to those of synergy‐motivated acquisitions. The authors conjecture that these differences originate from those accounting‐based contracts that are likely impacted by reported post‐acquisition balance sheet and income statement amounts.

Practical implications

The findings of the paper show that the motive for the acquisition has lasting effect, several years post acquisition on the quality of earnings produced by the merged entity; thus furnishing additional importance to identifying the motive for the acquisition.

Originality/value

The paper uses the corporate acquisition setting to examine earnings quality during the post‐acquisition period. This paper should be relevant for researchers studying either the quality of earnings or corporate acquisitions.

Keywords

Citation

Barragato, C.A. and Markelevich, A. (2008), "Earnings quality following corporate acquisitions", Managerial Finance, Vol. 34 No. 5, pp. 304-315. https://doi.org/10.1108/03074350810866180

Publisher

:

Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited