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Real activities manipulation by bidders prior to mergers and acquisitions

Real activities manipulation by bidders prior to mergers and acquisitions
Real activities manipulation by bidders prior to mergers and acquisitions
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.
1475-7702
322-347
Farooqi, J.
43420ecc-d373-4f72-9918-89df5faceb46
Ngo, T.N.
26629670-750c-4d2e-9aea-acad9f882306
Jory, S.
2624eb24-850a-48f6-b3c6-c96749b87322
Farooqi, J.
43420ecc-d373-4f72-9918-89df5faceb46
Ngo, T.N.
26629670-750c-4d2e-9aea-acad9f882306
Jory, S.
2624eb24-850a-48f6-b3c6-c96749b87322

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.

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Accepted/In Press date: 27 January 2017
e-pub ahead of print date: 14 August 2017
Organisations: Banking & Finance, Southampton Business School

Identifiers

Local EPrints ID: 405378
URI: http://eprints.soton.ac.uk/id/eprint/405378
ISSN: 1475-7702
PURE UUID: d153b15e-bf3a-4b9d-a2b2-3b3de13b53f4
ORCID for S. Jory: ORCID iD orcid.org/0000-0002-8265-0001

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Date deposited: 03 Feb 2017 11:15
Last modified: 28 Apr 2022 05:21

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Contributors

Author: J. Farooqi
Author: T.N. Ngo
Author: S. Jory ORCID iD

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