Doctoral thesis

Earnings management before M&As for target firms, and analyses of the consequences


  • Fribourg, Switzerland : [éditeur non identifié], 2021

1 ressource en ligne (201 pages) ; 1 fichier pdf

Thèse: Université de Fribourg (Suisse), 2021

English Mergers and acquisitions (M&A) are important corporate events with significant impacts on all stakeholders involved (target shareholders, bidders’ shareholders, employees, managers, governments, etc.), and accounting plays a fundamental role in the process. Target managers have the ability and motivations to influence accounting choices before the announcement. The managerial choices can be divided into two motivations: managerial opportunism and efficiency rationale. To fully understand the managerial choices, it is crucial to understand the consequences and incentives.
The aim of this thesis is to detect the earnings management (EM) before M&A announcements of target firms. The existing literature has already studied this argument, with mixed results and interpretations. This thesis also aims to examine the consequences for the stakeholders of such manipulation and tries to disentangle the motivation behind the accounting decisions. To the author’s knowledge, nobody has studied the argument under this perspective in depth yet, including the direction of the manipulation, the effects, and the possible motivations.
EM is defined as the use of managerial discretion to influence the measure of earnings, and it can occur through three main techniques: accruals earnings management, real-activity earnings management and classification shifting (Walker 2013). Moreover, as suggested by Ronen and Yaari (2008), EM can be either opportunistic or efficient. For the sample of European target firms over the period between 2005 and 2015, it is detected that firms manage their earnings downward through accruals and real-activity earnings management, consistent with most of the previous literature about management buyouts (MBO) and friendly takeovers.
Given the existing literature, two competing hypotheses arise to explain the downward manipulation. First, managers act opportunistically and bargain for private benefits with the shareholders’ wealth. Second, managers act efficiently and respect their fiduciary duty. They employ efficient EM to signal private information, increase the likelihood of deal completion, decrease the likelihood of litigation and create fictitious post-acquisition performance through the EM reversal without harming the shareholders.
The first study focuses on the effect of EM on the premium. The results indicate that downward manipulation increases the premium offered by the bidder. Moreover, target firms with negative accruals benefit, on average, from a 9% higher premium than firms that do not manipulate or that manipulate upward. The results observed do not seem to support the hypothesis of managerial opportunism. Specifically, target management does not seem to choose income-decreasing accounting choices to decrease the acquisition price. The second study investigates the effect of EM on CEOs’ retention rate. Existing literature suggests and observes empirically that target managers are likely to collude with the acquirer to lower the acquisition price and profit from private benefits, like holding their CEO position in the combined company, receiving a golden parachute (e.g., Shleifer and Vishny 2003; Hartzell et al. 2004; Wulf 2004; Moeller 2005; Fich et al. 2011; Fich et al. 2013; Qiu et al. 2014). Based on that, this study examines whether CEOs of firms that downward manipulate are more likely to hold their position in the post-acquisition period. The results exhibit show that the retention rate of CEOs of firms that completed the deal is higher when they manipulate their abnormal accruals downward. Nevertheless, the results do not show that target CEOs manage the earnings to trade their position for a lower premium. Overall, the CEOs of target firms seem to select accounting procedures that please the acquirer, increase the likelihood of keeping them in the CEO position and seem not to harm the target shareholders. The third chapter focuses on the transparency of financial statements around the M&A transaction. Prior research posits that EM can be misleading or informative (Lang and Lundholm 1996; Healy and Palepu 2001; Schrand and Verrecchia 2002). It is assumed that misleading EM is less transparent than informative EM. Hence, analysts’ accuracy will be lower for firms with misleading EM compared to firms with informative EM. The results suggest a negative relation between EM and analysts’ forecast accuracy for a sample of non-target firms; while for target firms, the results do not show any relation between the analysts’ forecast error and the EM. The evidence advocates that target firms manage the earnings before the deal announcement transparently, in a way that does not mislead the market participants. The results are robust and support the hypothesis that target firms do not change their disclosure policy to hide information, despite the downward manipulation. Overall, EM of target firms seems to be a negotiated strategy that does not mislead the target shareholders. In summary, European target firms seem to engage in income-decreasing accounting and real-activity choices the year before the announcement. This behaviour does not seem to be due to an opportunistic behaviour that harms the target shareholders. Indeed, target shareholders receive a higher premium, the market seems to understand the EM strategy and the CEOs that employ this strategy are more likely to be retained in the post-acquisition period. These results seem to support the hypothesis of efficient EM before the deal announcement. It is assumed that the motives behind the downward manipulation of target firms create fictive performance in the post-acquisition period through the EM reversals, decrease litigation risks with conservative accounting and clean the balance sheet from past burdens, which pleases the acquirer.
Faculté des sciences économiques et sociales et du management
  • English
  • Ressource en ligne consultée le 2021-11-11
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