Do Financial Statement Misstatements Facilitate Corporate Acquisitions?
Todd D. Kravet
University of Texas at Dallas - Naveen Jindal School of Management
Linda A. Myers
University of Arkansas
Juan Manuel Sanchez
Texas Tech University
University of Kansas - Accounting and Information Systems Area
April 24, 2014
We investigate the association between corporate acquisition activity and the incidence of income-increasing financial statement misstatements, and we ask whether misstatements facilitate acquisitions. We find that firms misstating their financial statements are more likely to make stock-based acquisitions after the start of the misstatement but are not more likely to make cash-based acquisitions. We also find that misstatements beginning before stock-based acquisitions tend to be more serious than other misstatements. Moreover, stock price reactions to restatement announcements are more negative, by 280 basis points on average, when stock-based acquisitions were made during the misstatement period. We also find that stock-based acquisitions made during misstatement periods are significantly more likely to result in goodwill impairments than are stock-based acquisitions made during non-misstatement periods. Collectively, these results suggest that managers exploit earnings overstatements to facilitate acquisitions.
Number of Pages in PDF File: 52
Keywords: Misstatements, Restatements, Earnings Management, Mergers, Acquisitions
JEL Classification: G14, G34, M41, M43working papers series
Date posted: March 27, 2012 ; Last revised: April 25, 2014
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