Do targets grab the cash in takeovers: The role of earnings management

Campa, Domenico; Hajbaba, Amir

doi:10.1016/j.irfa.2016.01.008

Cited by 24 publications

(30 citation statements)

References 51 publications

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“…These results imply that takeover targets do not manage their earnings through sales manipulation in the first period with an earnings release prior to the announcement of the deal, and as such, H1 is rejected. These results are not consistent with those of Campa and Hajbaba (2016), who find evidence indicating that US target companies acquired in the period from 2001 to 2011 exhibit lower cash flows from operations (upwards sales manipulation) in the first year before the acquisition, given a similar level of sales than the years before, but only for cash-acquired targets. Nevertheless, Campa and Hajbaba (2016) do not attempt to partition their sample of targets into three subsamples as in this study, hence their results may be interpreted differently.…”

Section: Empirical Results and Discussioncontrasting

confidence: 95%

“…In contrast to AEM, in which managers adjust assumptions, estimates and choices within the accounting system, REM involves the timing and structuring of normal business activities to achieve a favourably perceived and desired financial reporting result (Kothari et al , 2016; Bereskin et al , 2018). Although AEM has been the primary practice addressed in the EM literature (Dechow et al , 2010; Fang et al , 2016; Lo et al , 2017), recent research shows an increased interest in understanding the role of REM (Campa and Hajbaba, 2016; Bereskin et al , 2018), as chief financial officers would prefer to use REM activities rather than AEM to reach a certain earnings benchmark or target prior to M&As (Graham et al , 2005).…”

Section: Introductionmentioning

confidence: 99%

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Real earnings manipulation surrounding mergers and acquisitions: the targets’ perspective

Elrazaz

Elmassri

Yousry

2021

IJAIM

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Purpose This paper aims to investigate whether UK public targets manage their earnings using real activities manipulation in the period prior to the announcement of a mergers and acquisition (M&A). It also examines whether the payment method in M&As affects the degree to which takeover targets manipulate earnings. Design/methodology/approach Using a sample of 131 UK listed targets acquired over the period 1995–2013, this paper examines real earnings management (REM) by employing OLS regression models. The data related to deals have been mainly collected from Thomson One Banker and Thomson Reuters Eikon databases. REM is examined by investigating abnormal cash flow from operations, abnormal discretionary expenses and abnormal production costs. This analysis was supplemented by conducting additional robustness checks. Findings The results show that UK takeover targets manage earnings upwards through cutting discretionary expenses in the year prior to the acquisition, while they do not do so by manipulating sales or production costs. Moreover, targets of cash-only or mixed-payment deals do not have the same strong motivation to manage their earnings as stock-financed deal target counterparts do. Our results continue to hold after using alternative accrual earnings management (EM) measures, controlling for unobservable firm heterogeneity using the fixed-effect model and controlling for endogeneity using the two-stage Heckman (1979) model. Practical implications The main findings of this study could be beneficial for various parties involved M&As, such as standard setters and regulators. A need arises to improve disclosure rules and enhance overall financial reporting quality in the capital markets with the aim of reducing information asymmetry and agency conflicts. Originality/value As far as the literature on EM around M&As is concerned, only EM by acquirers has been examined, and not much attention has been paid to targets’ EM.

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Section: Empirical Results and Discussioncontrasting

confidence: 95%

Section: Introductionmentioning

confidence: 99%

Real earnings manipulation surrounding mergers and acquisitions: the targets’ perspective

Elrazaz

Elmassri

Yousry

2021

IJAIM

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“…We define firms to be of low accounting quality if they belong to an industry characterized by low accruals quality. We focus on the industry because: (1) this measure is not affected by the target's deliberate manipulations of financial information in anticipation of a takeover (Anagnostopoulou and Tsekrekos, 2015; Campa and Hajbaba, 2016); (2) this allows us to retain private targets in the sample; and (3) McNichols and Stubben (2015) find that acquisitions of targets from low accounting quality industries associate with more negative price reactions for the bidders. Sensitivity tests show that our conclusions are unchanged when we measure accrual quality for public targets.…”

Section: Measures Of Accounting Quality and Target Valuation Difficultymentioning

confidence: 99%

Accounting Firms in the European M&A Advisory Market

Bilinski

Yim

2021

British J of Management

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Building on the knowledge-based view of the resource-based theory, we propose that accounting firms leverage the industry expertise acquired from the audits of the targets' industries to produce fairer target valuations on mergers and acquisitions (M&As). The accounting expertise competitive advantage explains why bidders choose accounting firms, rather than investment banks, to advise on transactions where the likelihood of overpaying for a target is high. We document that for such deals, acquirer announcement returns are higher and offer premia are lower if the bidders are advised by accounting firms that are audit specialists in the target's industry. Our results explain why accounting firms are listed among the top 10 M&A financial advisors in the European Thomson Reuters and Mergermarket league tables.

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“…Though on average mergers may create value, not all transactions are successful. Mispricing of target firms can lead to acquirers incurring negative returns around the announcement period (e.g., Han et al 1998) or a negative longrun post-acquisition performance (e.g., Campa and Hajbaba 2016). Acquirers often misprice targets and overpay for them, causing a wealth transfer from acquirer to target shareholders (Moeller et al 2005).…”

Section: Introductionmentioning

confidence: 99%

“…;Campa and Hajbaba 2016;McNichols and Stubben 2015;Moeller et al 2005;Rabier 2018;Rhodes-Kropf et al 2005). Prior literature has also related targets' accounting quality to bid prices (e.g., McNichols and Stubben 2015; Raman et al 2013; Skaife and Wangerin 2013), while Rabier (2018) examines the relative valuation roles of aggregate earnings and book value of equity in merger pricing.…”

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confidence: 99%

Earnings properties

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Do targets grab the cash in takeovers: The role of earnings management

Cited by 24 publications

References 51 publications

Real earnings manipulation surrounding mergers and acquisitions: the targets’ perspective

Real earnings manipulation surrounding mergers and acquisitions: the targets’ perspective

Accounting Firms in the European M&A Advisory Market

Earnings properties

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