No abstract

This study investigates the pattern of acquirers' earnings management over the period between the acquisition announcement and the deal completion. This window is longer than a quarter on average and potentially is a hotbed for earnings management. Acquirers manage their earnings downwards in this event window. This temporary decline in earnings is positively correlated with the hike of earnings immediately after the deal completion. This effect is accentuated for stock-for-stock deals. Consistent with managerial incentive as a factor for earnings management, we find that this earnings management is negatively correlated with earnings surprises, is higher when announcement return is lower, and is higher when manager compensation is more sensitive to share prices. Further analysis reports that acquirer's temporary interim-period earnings understatement does not relate to the likelihood of a deal completion or the long-term performance. This study highlights a reverse trend of downward earnings management and the acquirer's influence on both acquirer and target to lower earnings during the interim period, in hopes of boosting postmerger earnings and retrospectively justifying the merger deal.