Earnings Management by Acquiring Firms in Stock for Stock Mergers

This study investigates the manipulation of accounting earnings in the period preceding the announcement and completion of stock for stock mergers by a sample of acquiring firms. Results indicate that in the quarters prior to the merger, acquiring firms manage earnings upward. This result is consistent with the conclusion that acquiring firms use accounting procedures in an attempt to increase their stock price prior to stock for stock mergers. Further investigation indicates that unexpected accounting accruals are related to the economic benefits at stake to the acquiring firm and its manager-shareholders. We measure economic benefits to the acquiring firm from increased reported accounting earnings as the deal ratio (deal value as a percentage of the acquiring firm's market value) and management ownership of the acquiring firm. Our analysis indicates that acquiring firm income increasing accounting manipulations prior to a merger are positively related to the relative size of the deal.

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