Deferred Gratification: Acquirers' Earnings Management during the Interim Period of Acquisitions

• In Event: Various Topics in Accounting

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 is likely to be a hotbed for earnings management. It shows that acquirers manage their earnings downwards between the announcement and the completion dates of a deal. 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. We also find that this earnings management is negatively correlated with earnings surprises. Further analysis reports that acquirer's temporary interim-period earnings understatement does not relate to the likelihood of a deal completion. This study highlights that acquirers exercise their influence to lower both acquirer and target earnings during the interim period, in hopes of boosting post-merger earnings and retrospectively justifying the merger deal.

Authors

• Yuechan Lu, University of Massachusetts Boston

• Winifred Huang, University of Bath