Do Firms that Wish to Be Acquired Manage Their Earnings? Evidence from Major European Countries
37 Pages Posted: 23 Jun 2013 Last revised: 28 May 2014
Date Written: June 21, 2013
In this paper, we examine whether findings on downwards accrual-based earnings management for firms publicly ‘seeking a buyer’ from the US can be extrapolated outside of the US context, given that past research has indicated that the function of the Merger and Acquisition (M&A) markets is highly dependent on the degree of competition in a country. We test for the existence of earnings management (EM) around such events for firms listed in the largest European stock exchanges between 2000 and 2009, and get evidence that downwards earnings management around ‘seeking buyer’ announcements more strongly holds for the country with the most competitive market for corporate control in our sample, that is the UK. We consider this finding indicative of the fact that a competitive M&A environment may induce earnings management-prone behavior. We further testify significantly positive abnormal returns around ‘seeking buyer’ announcements for firms from the UK, but limited such evidence for the other countries, a finding we also attribute to differences in competition and uneven split of benefits among bidders and targets in M&A markets. Finally, we find that EM positively affects abnormal returns around ‘seeking buyer’ announcements, indicating that market participants tend to compensate for upwards EM, regardless of the degree of competition of the M&A market of a country.
Keywords: acquisition targets, seeking a buyer, takeovers, earnings management
JEL Classification: M41, G34
Suggested Citation: Suggested Citation