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Target Firm Earnings Management, Acquisition Premium, and Shareholder Gains

Author

Listed:
  • Javeria Farooqi

    (Lindenwood University, 209 S. Kingshighway, St. Charles, MO 63301, USA)

  • Surendranath R. Jory

    (University of Southampton, University Road, Southampton, SO17 1BJ, UK)

  • Thanh N. Ngo

    (East Carolina University, E 5th Street, Greenville, NC 27858, USA)

Abstract

Using a sample of U.S. domestic deals from 1990 to 2016, we find that bidders adjust the amount of premium paid in mergers and acquisitions (M&As) based on the levels of earnings management at target firms. However, the way a firm manipulates earnings upward matters: earnings management via real activities manipulation is more detrimental than discretionary accruals. As a result, target firms that engage in real earnings management receive lower premiums in M&As, while accruals management has no effect on premiums. Correspondingly, we find that the targets’ M&A announcement-period cumulative abnormal returns are inversely related to their level of real earnings management, while the returns are not related to accruals management. Further analyses confirm that target shareholders’ wealth is not only driven by undervaluation, expected synergy, and managerial hubris, but also reflects bidders’ perception of the target firms’ earnings quality based on real earnings management.

Suggested Citation

  • Javeria Farooqi & Surendranath R. Jory & Thanh N. Ngo, 2020. "Target Firm Earnings Management, Acquisition Premium, and Shareholder Gains," The International Journal of Accounting (TIJA), World Scientific Publishing Co. Pte. Ltd., vol. 55(02), pages 1-48, June.
    • Handle: RePEc:wsi:tijaxx:v:55:y:2020:i:02:n:s1094406020500092
    DOI: 10.1142/S1094406020500092
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    Cited by:

    1. Sawssen Khlifi & Ghazi Zouari, 2021. "The Impact of CEO Overconfidence on Real Earnings Management: Evidence from M&A Transactions," Journal of Accounting and Management Information Systems, Faculty of Accounting and Management Information Systems, The Bucharest University of Economic Studies, vol. 20(3), pages 402-424, September.
    2. Perafán-Peña, Héctor Fabio & Gill-de-Albornoz, Belén & Giner, Begoña, 2022. "Earnings management of target firms and deal premiums: The role of industry relatedness," The British Accounting Review, Elsevier, vol. 54(2).
    3. Franck Missonier‐Piera & Cédric Spadetti, 2023. "The consequences of earnings management for the acquisition premium in friendly takeovers," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(1-2), pages 308-334, January.

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