Purpose -The purpose of this paper is to investigate the link between ownership structure, earnings management (EM) preceding mergers and acquisitions (M&A) and the acquiring firm's subsequent long-term market performance. Design/methodology/approach -The authors measure the magnitude of discretionary current accruals using two methodologies, that of Teoh et al. and that of Kothari et al. The latter methodology is used to control for the presence of extreme performance prior to the event. The calendar-time Fama-French three-factor model was used to evaluate long-term stock performance and to minimize potential problems related to the cross-sectional dependence of the returns. Findings -It was found that firms using stock as a financing medium exhibit significant positive discretionary accruals during the year preceding the M&A and during the year of the acquisition. It was also documented that voting right concentration and control-enhancing mechanisms are not associated with any significant level of earnings management. Finally, a negative association was found between EM and abnormal stock returns over a three-year period following the acquisition. Research limitations/implications -These results suggest that the concentrated ownership alignment effect dominates the entrenchment motives and acts as a deterrent mechanism to prevent controlling shareholders from managing earnings in stock-financed M&A. Practical implications -The authors' results highlight the importance of maintaining good legal and extra-legal protection of minority shareholders. Regulators can play an important role in preventing dominant shareholders from engaging in opportunistic EM in stock-financed M&A. Originality/value -The paper extends prior literature by taking a closer look at dominant shareholders' motivations to manage earnings in stock-financed M&A. Large shareholders have strong incentives to manage earnings upward prior to stock-financed transactions to limit the dilution of their controlling position.
Résumé La pratique traditionnelle des sociétés ouvertes consistant à faire parvenir systématiquement un rapport annuel global à leurs actionnaires est en voie de disparition. En effet, plusieurs sociétés américaines et canadiennes, sous prétexte de déposer leurs informations comptables et financières auprès des autorités en valeurs mobilières ou sur leur site web, abandonnent cette pratique. Pourtant, rendre l’information disponible et communiquer l’information aux principaux intéressés sont deux actions différentes. Dans le contexte actuel de la surveillance et de l’amélioration de la gouvernance des entreprises, les sociétés abandonnant cet envoi systématique s’acquittent-elles de leur responsabilité quant à la communication? Dans cet article, nous présentons la situation. Ensuite, nous examinons les diverses réglementations eu égard à la communication avec les actionnaires. Puis, afin d’apporter un éclairage sur la responsabilité des entreprises en matière de communication, nous abordons certaines théories de la communication. Enfin, nous suggérons aux sociétés et aux organismes de réglementation une pratique renouvelée de production de rapports et de distribution de ceux-ci aux actionnaires.
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This case addresses the accounting for mergers and acquisitions in Canada. Since January 1, 2011, any new transactions from mergers and acquisitions made by a public company must be recorded in accordance with the International Financial Reporting Standards (IFRS). In the case of a partial acquisitions, two theoretical approaches to accounting is allowed under IFRS 3: the approach of a separate entity and the modified approach of the parent entity. For mergers and acquisitions that occurred before this date, firms could either be early adopters to IFRS or firms could apply the Canadian standards that were allowed at the time of reunification. Under Canadian GAAP (CICA, Chap. 1581), partial acquisitions are accounted for using the approach of the parent entity. Canadian public companies that have chosen to recognize their business combinations which occurred before January 1, 2011, according to the approach of the parent entity, may continue to do so even after the enforcement of IFRS. Thus for years to come, we can see in the financial statements of various Canadian public companies business combinations presented in three different ways: according to the separate entity approach, the parent entity approach and, the modified approach of the parent entity. We also include in the case the U.S. GAAP for mergers and acquisitions. In this case, we strongly draw on an acquisition that actually happened, which we adapted to illustrate the three theoretical approaches to account for mergers and acquisitions. In particular, we have changed the name of the company.
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