A Firm’s Earnings and the Likelihood of its Acquisition

• In Event: Earnings management incentives
  In Paper Session: Earnings Management Incentives

Abstract

We examine the association between a firm’s earnings and its likelihood of being acquired. Prior research argues that underperforming firms are more likely to be taken over because of inefficient management. However, prior literature finds mixed results for the association between earnings and takeover probability. We argue that firms with abnormally high earnings are also attractive takeover targets because of acquirers’ incentives to manage earnings. We find that a firm’s takeover likelihood is negatively (positively) associated with industry-adjusted ROA when the firm’s earnings is below (above) industry average ROA. We also find that the positive association is more pronounced when acquirers’ have higher agency problems.

Authors

• Todd Kravet, University of Connecticut

• Ashiq Ali, The University of Texas at Dallas

• Bin Li, The University of Texas at Dallas