Event-specific earnings management: additional evidence from US M&A pre-and post-SOX

Abstract

Purpose

The purpose of this paper is to re-examine the motivation to manage earnings in US mergers and acquisitions (M&As) by investigating whether the enactment of Sarbanes-Oxley act (SOX) has affected pre-merger earnings management.

Design/methodology/approach

The authors used a sample of over 700 completed M&As of US public firms during 1999-2008. Using quarterly reports, they tracked down earnings management during the four quarters preceding the deal and consequently drew inferences about the implications of SOX on interim reporting practices.

Findings

We report evidence that in the post-SOX era, non-cash acquirers begin pre-merger upwards earnings management in an earlier quarter than in the pre-SOX era. Further, our evidence indicates that in the quarters prior to the takeover, targets engage in more aggressive upwards earnings management in the post-SOX era.

Originality/value

Unlike what is anticipated regarding earnings management practices after SOX, the study reveals significant evidence of upward earnings management by firms engaging in M&A in post-SOX era.

Citation

Alsharairi, M., Dixon, R. and Al-Hamadeen, R. (2017), "Event-specific earnings management: additional evidence from US M&A pre-and post-SOX", Journal of Financial Reporting and Accounting, Vol. 15 No. 1, pp. 78-98. https://doi.org/10.1108/JFRA-11-2015-0097