Earnings Management by Acquiring Firms in Stock for Stock Mergers

Journal of Accounting and Economics, Vol 27, No 2. April 1999

Posted: 9 Dec 1998

See all articles by Merle Erickson

Merle Erickson

University of Chicago - Booth School of Business

Shiing-wu Wang

University of Southern California - Leventhal School of Accounting

Abstract

This study investigates the manipulation of accounting earnings in the period preceding the announcement and completion of stock for stock mergers by a sample of acquiring firms. Results indicate that in the quarters prior to the merger, acquiring firms manage earnings upward. This result is consistent with the conclusion that acquiring firms use accounting procedures in an attempt to increase their stock price prior to stock for stock mergers.

Further investigation indicates that unexpected accounting accruals are related to the economic benefits at stake to the acquiring firm and its manager-shareholders. We measure economic benefits to the acquiring firm from increased reported accounting earnings as the deal ratio (deal value as a percentage of the acquiring firm's market value) and management ownership of the acquiring firm. Our analysis indicates that acquiring firm income increasing accounting manipulations prior to a merger are positively related to the relative size of the deal.

Note: This is a description of the paper and not the actual abstract.

JEL Classification: M41, M43, G34

Suggested Citation

Erickson, Merle and Wang, Shiing-wu, Earnings Management by Acquiring Firms in Stock for Stock Mergers. Journal of Accounting and Economics, Vol 27, No 2. April 1999, Available at SSRN: https://ssrn.com/abstract=141614

Merle Erickson (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-0716 (Phone)
773-702-0458 (Fax)

Shiing-wu Wang

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-5012 (Phone)
213-747-2815 (Fax)

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