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Real activities manipulation by bidders prior to mergers and acquisitions

Javeria Farooqi (Lindenwood University, St. Charles, Missouri, USA)
Thanh Ngo (East Carolina University, Greenville, North Carolina, USA)
Surendranath Jory (University of Sussex, Brighton, UK)

Review of Accounting and Finance

ISSN: 1475-7702

Article publication date: 14 August 2017




This study aims to examine the ability of investors to process signs of real activities manipulations at bidder firms in the quarters leading to the announcement of a merger. It further provides a supplementary explanation for the post-merger underperformance puzzle.


Examining a sample of cash-only, stock swap and mixed mergers completed between 1980 and 2011, it was found that bidder firms increase the use of real activities manipulation in the quarters leading up to the merger announcements. Using average abnormal stock return method, it is shown that the short-term positive effect of real activities manipulation on share prices is stronger than accrual-based earnings management.


While bidders are able to escape investors’ scrutiny in the short run, it is not the case in the long run. It was found that bidders’ long-run stock performance, measured by matched buy-and-hold stock returns, is inversely related to their pre-announcement level of earnings management. This paper contributes to the literature on earnings management by considering how real activities manipulations affect stock prices in mergers and acquisitions.


This study tests whether real activities manipulation, in addition to accrual-based earnings management, explains the underperformance puzzle of the acquiring firms in M&As. Zang (2012) argues that there is a greater likelihood for firms to engage in real activities manipulation, especially when firms are constrained in their use of accrual-based earnings management owing to heightened scrutiny or overuse in prior years.



Farooqi, J., Ngo, T. and Jory, S. (2017), "Real activities manipulation by bidders prior to mergers and acquisitions", Review of Accounting and Finance, Vol. 16 No. 3, pp. 322-347.



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