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Spring-Loading When No One is Looking? Earnings and Cash Flow Management Around AcquisitionsShuping ChenUniversity of Texas at Austin - Red McCombs School of Business Jacob K. ThomasYale School of Management Frank ZhangYale School of Management February 13, 2013 Abstract: We identify how 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. Our results suggest that acquirers induce targets to understate performance during this 'quiet' period to create reserves that are transferred to the acquirer. Not only is acquirer performance boosted after the acquisition, that overstatement is related cross-sectionally to target performance understatement during the quiet period. 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 the deal is announced.
Number of Pages in PDF File: 44 Keywords: mergers and acquisitions, earnings management, cash flow management JEL Classification: C71, G31, G34, M41 working papers seriesDate posted: July 27, 2011 ; Last revised: February 18, 2013Suggested CitationContact Information
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