Do Firms with an Increasing Earnings String Time Their Mergers and Acquisitions Before the String Breaks?

• In Event: Financial III

Abstract

Testing the timing hypothesis using price-based measures as a proxy for overvaluation is fraught with difficulties, particularly in the merger and acquisition (M&A) setting. This study examines whether managers of firms with an increasing earnings string time their M&As using their private knowledge as to when the string will break. We find that firms with such a string are more likely to make a stock-paid acquisition before the string breaks. Further, string firms with an impending stock-paid acquisition are inclined to manage earnings upward to sustain the string until the acquisition agreement, which is soon followed by a string break. Finally, string firms whose string breaks soon after making a stock-paid acquisition are more liable to experience post-M&A underperformance. Overall, our evidence suggests that managers in firms with an increasing earnings string strategically time stock-paid acquisitions using their private information about when the string will break while they strive to sustain the string by managing earnings until the acquisition agreement.

Authors

• Yiyang Zhang, Youngstown State University

• Mengmeng Wang, SUNY-Buffalo

• Inho Suk, SUNY-Buffalo