Real earnings manipulation surrounding mergers and acquisitions: the targets’ perspective
International Journal of Accounting & Information Management
ISSN: 1834-7649
Article publication date: 8 June 2021
Issue publication date: 3 August 2021
Abstract
Purpose
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/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. 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.
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 (EM) measures, controlling for unobservable firm heterogeneity using the fixed-effect model and controlling for endogeneity using the two-stage Heckman (1979) model.
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.
Originality/value
As 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.
Keywords
Acknowledgements
The authors gratefully acknowledge the helpful comments and suggestions received from the three anonymous reviewers. Editor-in-Chief Maggie Liu provided excellent editorial support. All the remaining errors are the sole responsibility of the authors.
The authors gratefully acknowledge the financial support provided by United Arab Emirates University (UAEU), Grant Code: G00003349.
Declaration of conflicting interests: The authors declare no potential conflicts of interest with respect to the research, authorship and/or publication of this article. There are no financial and personal relationships with other people or organisations that could inappropriately influence (bias) their work.
Citation
Elrazaz, T.Z., Elmassri, M. and Ahmed, Y. (2021), "Real earnings manipulation surrounding mergers and acquisitions: the targets’ perspective", International Journal of Accounting & Information Management, Vol. 29 No. 3, pp. 429-451. https://doi.org/10.1108/IJAIM-11-2020-0188
Publisher
:Emerald Publishing Limited
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