Firm acquisitions and earnings management: evidence from Greece

Abstract

PurposeTo investigate whether acquiring firms listed in the Athens Stock Exchange, that completed mergers and acquisitions during the period 2001‐2003, tend to manipulate accounting earnings upward prior to the initiation and completion of the transaction.Design/methodology/approachThe focus is on discretionary accruals as a measure of managers' earnings manipulation. To estimate discretionary and non‐discretionary components of total accruals the time series Jones model is adopted.FindingsResults provide weak evidence of biased accruals reported by managers in the year preceding the announcement and the completion of the deal. The results seem to agree with those of Erickson and Wang who found no evidence of pre‐merger earnings management by a sample of acquiring firms that were involved in cash mergers.Research limitations/implicationsThe model applied, even if it is considered effective in discriminating abnormal from normal accruals, has been shown to have certain deficiencies, while simultaneously the time series data and number of firms used here could be considered as small. Within the aforementioned limitations further research could examine the effect of mergers and acquisitions in the stock price of the acquiring of target firms and the possibility of earnings management by target firms, since target managers may have different incentives to manipulate earnings.Practical implicationsFindings are of particular interest to Greek regulators for policy‐making purposes as well as to investors in the Greek capital market.Originality/valueTo the best of one's knowledge this is the first study to examine earnings management by acquiring firms in the European capital market context.

Accrual and real-based earnings management by UK acquirers

“…For example, Koumanakos et al (2005) examine a sample of 42 acquiring firms that successfully completed their bids in Greece (Eddey and Taylor, 1999). Ben-Amar and MissionierPiera (2008) on the other hand, find that managers of friendly takeover targets in Switzerland manage earnings downwards in the year prior to the event.…”

Auditor awareness of earnings management

“…We also exclude initial public offerings (IPOs; 21) from the year 2002 since recent empirical evidence (Koumanakos and Tzelepis, 2004;Roosenboom et al, 2003;Teoh et al, 1998) indicate that IPOs tend to manipulate their earnings upward in the period around the listing. However, we do not eliminate from our analysis Greek listed firms engaged in merges and acquisitions (M&A) or seasoned equity offerings (SEOs) taking place in the period under consideration because Greek empirical studies (Cohen et al, 2004;Koumanakos et al, 2005) indicate no evidence of earnings-management adoption around these events. Finally, elimination of firms with incomplete data and outliers leaves us with an event sample of 58 suspect firms as opposed to 232 non-suspect firms, which comprise our control sample.…”

Earnings Management of Acquiring Firms in Stock-for-Stock Takeovers in the Telecommunications Industry

“…Earnings management is generally defined as the process of taking intentional actions within the constraints of generally accepted accounting principles to accomplish a desired level of reported earnings (Koumanakos, Siriopoulos, & Georgopoulos, 2005). Although it is regarded as an area of considerable academic interest in accounting and business administration, there have been few studies examining earnings management during takeover transactions in stockfor-stock takeovers.…”

“…4 First, this article selected a sample based on the standard industrial classification major group 48, which refers to the "communications industry" (i.e., telephone, radio, TV, and CATV). Second, this article excluded acquiring firms involved in acquiring only a proportion of fixed assets, but not ownership, following the research ofKoumanakos, Siriopoulos, and Georgopoulos (2005). Third, this article excluded any hostile takeovers or tender offers because these transactions do not involve the negotiation of an exchange ratio, and the stock price is not as relevant as in the case of negotiated mergers(Erickson & Wang, 1999).…”