Real activities manipulation by bidders prior to mergers and acquisitions

Farooqi, J., Ngo, T.N. and Jory, S. (2017) Real activities manipulation by bidders prior to mergers and acquisitions. Review of Accounting and Finance, 16 (3), 322-347. (doi:10.1108/RAF-12-2014-0132).

Record type: Article

Abstract

This study examines the ability of investors to process signs of real activities manipulations at bidder firms in the quarters leading to the announcement of a merger. It further provides a supplementary explanation for the post-merger underperformance puzzle. Examining a sample of cash-only, stock-swap, and mixed mergers completed between 1980 and 2011, we find that bidder firms increase the use of real activities manipulation in the quarters leading up to the merger announcements. Using the average abnormal stock return method, we show that the short-term positive effect of real activities manipulation on share prices is stronger than accrual based earnings management. While bidders are able to escape investors’ scrutiny in the short run, it is not the case in the long run. We find that bidders’ long run stock performance―measured by matched buy-and-hold stock returns―is inversely related to their pre-announcement level of earnings management. We contribute to the literature on earnings management by considering how real activities manipulations affect stock prices in mergers and acquisitions.

Text

Academic Papers EPrints & REF_SBS Papers in ePrints_Attached standard file.pdf - Accepted Manuscript

Available under License University of Southampton Accepted Manuscript Licence.

Download (595kB)