Abstract

http://ssrn.com/abstract=1895473
 
 

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Spring-Loading When No One is Looking? Earnings and Cash Flow Management Around Acquisitions


Shuping Chen


University of Texas at Austin - Red McCombs School of Business

Jacob K. Thomas


Yale School of Management

Frank Zhang


Yale School of Management

February 20, 2014


Abstract:     
We provide support for the view that targets and acquirers collaborate to manage earnings and cash flows around acquisitions. Using a sample of 2,128 completed deals from 1985-2010, we find that targets depress earnings and cash flows when investor attention declines once the deal parameters are set and that performance understatement is transferred to acquirers. Not only is acquirer post-acquisition performance boosted, it is related cross-sectionally to target performance understatement. Additional confirmation of transfers is provided by our finding that evidence of transfers is strong for large deals (with large transfer magnitudes) and weak for pooling transactions (with lower incentives to transfer). We contribute to the earnings management literature by showing that earnings and cash flows are transferred not just within firms but also across firms, and to the mergers and acquisitions literature by documenting that the incentives to manage performance exist not only before but also after deals are announced.

Number of Pages in PDF File: 50

Keywords: mergers and acquisitions, earnings management, cash flow management

JEL Classification: C71, G31, G34, M41

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Date posted: July 27, 2011 ; Last revised: February 20, 2014

Suggested Citation

Chen, Shuping and Thomas, Jacob K. and Zhang, Frank, Spring-Loading When No One is Looking? Earnings and Cash Flow Management Around Acquisitions (February 20, 2014). Available at SSRN: http://ssrn.com/abstract=1895473 or http://dx.doi.org/10.2139/ssrn.1895473

Contact Information

Shuping Chen
University of Texas at Austin - Red McCombs School of Business ( email )
Austin, TX 78712
United States
521.471.5328 (Phone)
Jacob Kandathil Thomas
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
Frank Zhang (Contact Author)
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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