Acquiring firms' earnings management in stock-for-stock mergers within Korean business groups

Abstract

Purpose

This study examines acquirers' earnings management in intragroup mergers to investigate whether stock-for-stock mergers between affiliated firms within the same family-controlled business group facilitate the controlling shareholder's rent seeking. Specifically, it investigates the acquiring firm's incentive to inflate premerger-announcement earnings in intragroup mergers given the controlling shareholder's relative equity holdings in the target and acquiring firms. The authors also examine how creditor monitoring affects premerger-announcement earnings in intragroup mergers compared to mergers between independent firms.

Design/methodology/approach

Using univariate analysis, panel regression based on accruals and cross-sectional regression based on discretionary accruals, the authors compare earnings management in mergers between affiliated firms with that in mergers between independent firms in the context of Korean business groups. The authors also compare the effects of creditors on earnings management in both cases.

Findings

Acquirers' premerger-announcement positive abnormal accruals are less evident in mergers between affiliated firms than in mergers between independent firms. These accruals decrease with high financial leverage only in the latter case, suggesting that creditor monitoring mitigates earnings management only in independent firm mergers.

Originality/value

The authors examine intragroup mergers, unlike previous studies, which focus on unaffiliated firm mergers. They also contribute to the literature on stock-for-stock mergers, showing that lender monitoring can mitigate the acquiring firm's premerger earnings management in unaffiliated firm mergers but not in intragroup mergers. These findings suggest that stock-for-stock mergers between affiliated firms may facilitate the controlling shareholders' rent seeking, which has policy implications for emerging markets with large family-controlled business groups.

Citation

Kim, K.S., Lee, J.H. and Park, Y.W. (2022), "Acquiring firms' earnings management in stock-for-stock mergers within Korean business groups", Managerial Finance, Vol. 48 No. 1, pp. 27-48. https://doi.org/10.1108/MF-05-2020-0262