Earnings management in firms seeking to be acquired

Abstract

Empirical evidence regarding accrual-based earnings management around mergers and acquisitions has been setting-specific as far as target firms are concerned. This might be due to the fact that target firms cannot anticipate an acquisition proposal, and thus lack the motive and the time necessary to manage their earnings in order to facilitate or impede the deal. In this paper, we provide clear evidence of downwards earnings management by a sample of target firms that have both time and motive to engage in such actions. These are firms that publicly announce their intention to be acquired. Publicly 'seeking a buyer' represents a rather unusual corporate event, and we find that these firms engage in downwards earnings management in the years surrounding the 'announcement year'. To some extent, this result is explained by overrepresentation of low growth and distress among these firms, but is still consistent with engaging in 'big bath' accounting in the year of the event. Furthermore, we show that such downwards earnings management negatively affects market performance around the announcement, and also the probability for a firm to secure an acquisition within a reasonable amount of time, indicative of prospective buyers having a preference for firms not "seeking buyer" under performance-related pressures.JEL classification: M41, G34

The Influence of Earnings Management and Tax Planning on Firm Value with Audit Quality as Moderating Variable

“…With the purpose of getting a high firm value in the public view based on the objectives of the company, the management did a variety of strategies and discussions are complicated to produce a good performance (Lo, 2017). With earnings management, the company do accrual decision in the accounting procedure both income or expenses in order to profit as reflected in the financial statements looked beautiful (Anagnostopoulou & Tsekrekos, 2015).…”

“…If earnings management activities use an improper method, then the financial statements produced are not real values either with manipulation or by reducing information (Ayers et al, 2009), if investors know this, earnings management activities will actually have a negative impact on firm value (Hanlon & Slemrood, 2007;Yorke et al, 2016;Bazrafshan et al, 2016;Shan, 2015). Several new companies listed on the Stock Exchange conducted earnings management to attract investors in the first (Anagnostopoulou & Tsekrekos, 2015) but these activities continued even though the number of shares had already been owned by the public (Chang & Lin, 2018).…”

Do industrial and geographic diversifications have different effects on earnings management? Evidence from UK mergers and acquisitions

“…Boone and Mulherin (2007) find that half of the targets were sold via auction in which the target privately contacted potential buyers prior to a public announcement. Shen (2005) and Anagnostopoulou and Tsekrekos (2012) examine earnings management by US "soliciting" and "seeking buyer" targets and find that they act as initiators of M&A transactions for a number of reasons, such as leverage, undervaluation, growth, strategy-related or distress. This evidence shows the takeover process seems to start long before the official date announcement and unofficial meetings between potential partners are usually launched in advance.…”

“…Consistent with their findings, Anilowski et al (2014) argue that targets in auction deals are more likely to use income-increasing earnings management to boost the stock price prior to a takeover. In contrast, Shen (2005) and Anagnostopoulou and Tsekrekos (2012) examine US soliciting targets and "seeking buyer" firms) held over 90% of the UK market in 2002 and audited all the FTSE 100 companies and most other listed companies.…”

“…Shen (2005) andAnagnostopoulou and Tsekrekos (2012) claim that soliciting targets make income-decreasing accruals choices to 'clean-up' their financial statements before a takeover which leads to an increased probability to secure a takeover.…”