Under-performance of listed companies? Real earnings management and M&A: Chinese empirical evidence

Abstract

Abstract:Purpose: The purpose of this paper is to examine whether acquiring firms attempt to adopt real earnings management strategy to upward reported earnings in the period of M&A Findings: It was found that firms using stock as a financing medium exhibit significant negative abnormal cash flows and abnormal discretionary expenses yet abnormal production costs significantly positive during the current period of M&A. Moreover, it was also documented that acquiring firms use real activities manipulation to overstate earnings for the purpose of improving market confidence. Finally, a negative association was found between REM and under-performance of post-M&A.-322-Journal of Industrial Engineering and Management -http://dx.doi.org/10.3926/jiem.1330Research limitations/implications: To some extent, these results explain the puzzle of performance decline over the following period of post-M&A. Meanwhile, our study adds to prior literature that capital market pressures induce acquiring firms inflate reported earnings by manipulating real activities in stock-financed M&Aoccurring in China's capital market. Practical implications:The author's result imply that investors, analysts and regulators cannot ignore more undetectable opportunism behaviors underlying reported earnings than accrualbased earnings management and the impact on the performance of post-M&A when they use financial statements to evaluate acquiring firms. Social implications:Our study plays important role in making public policies. Furthermore, it is necessary to improve outside supervisory mechanism and strengthen construction of honesty and faithfulness so as to realize the main purpose of value creation in M&A.Originality/value: The paper extends prior literature by taking a closer look at acquiring firms' managerial myopia behavior in stock-financed M&A. The administrators of acquiring firms have strong incentives to manage earning upward by adopting a more subtle way which is a costly means because it has value-destroying effect on performance of post-M&A.

Accrual and real-based earnings management by UK acquirers

“…In the M&A setting, only limited research examined the use of real manipulation around mergers. For example, Zhang (2015) found, in a sample of Chinese acquisitions during the period 2008-2010, that acquirers using stock-for-stock exchanges exhibit significant negative abnormal cash flows and discretionary expenses prior to the merger, which provides evidence of upward real earnings manipulation.…”

“…Zhang, 2015). Therefore, a comprehensive study that considers both accrual and real-based earnings management practices is needed to contribute to earnings management research in the UK M&A context.…”

“…Though prior research examined accrual-based manipulation in the M&A context in the USA (Erickson and Wang, 1999; Louis, 2004), the UK (Botsari and Meeks, 2008) and the Asia-Pacific region (Ardekani et al , 2012; Higgins, 2013; Jeong and Bae, 2013), only limited studies extended its scope to examine whether acquiring firms engage in the manipulation of real activities (Zhang, 2015). Therefore, a comprehensive study that considers both accrual- and real-based earnings management practices is needed to contribute to earnings management research in the UK M&A context.…”

Fusões, Aquisições e Gerenciamento de Resultados: uma revisão sistemática envolvendo diferentes categorias analíticas

“…Nesse contexto, Zhang (2015) analisou se as empresas adquirentes tentam adotar estratégia de EM por decisões operacionais (real earnings management -REM) para elevar os lucros no período de anúncio das F&A. Além disso, o autor também procurou fornecer uma explicação para o baixo desempenho pós-F&A stock-for-stock. Utilizando a metodologia proposta por Roychowdhury (2006) para medir a magnitude do REM, apontou que as empresas que utilizam ações como meio de financiamento em F&A apresentam fluxos de caixa anormais negativos e despesas discricionárias anormais negativas, mas custos de produção anormais significativamente positivos durante o período corrente da F&A (ZHANG, 2015). Os resultados apontam que as empresas adquirentes usam o REM para aumentar os lucros objetivando melhorar a confiança do mercado; também há uma associação negativa entre o REM e o baixo desempenho pós-F&A.…”

(Retracted) Pentingnya Kualitas Laba Untuk Memacu Nilai Perusahaan

“…Hakim & Hakim (2018), Yuanhui, Weiqian, Erwei, & Djajadikerta (2018), dan Zarviana, Nur, & Indrawati (2017) mendapati bahwa manajemen laba menjadi pengaruh negatif untuk nilai perusahaan. Gao & Zhang (2015) Zhang (2015) mendapat temuan bahwa manajemen laba menjadi pengaruh positif nilai perusahaan.…”