Abstract

http://ssrn.com/abstract=2029953
 
 

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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

Susan Scholz


University of Kansas - Accounting and Information Systems Area

March 27, 2012


Abstract:     
We investigate the association between corporate acquisition activity and the incidence of income-increasing financial statement misstatements, and we ask whether misstatements facilitate acquisitions. For firms that make acquisitions after misstating their financial reports, we find that acquisition announcements typically occur shortly after the first misstated report. We also find that the use of stock consideration increases the probability that managers misstate earnings before acquisitions by a substantial amount, and that misstatements beginning before stock-based acquisitions tend to be significantly larger than other misstatements. Controlling for restatement severity, we find that stock price reactions to restatement announcements are more negative, by 140 basis points on average, when acquisitions are made during the misstatement period. We also find that acquisitions made during misstatement periods are significantly more likely to result in goodwill impairments than are acquisitions made during non-misstatement periods. Collectively, these results suggest that managers intentionally inflate earnings in anticipation of acquisitions, and that acquisitions made during misstatement periods are more likely to be value destroying.

Number of Pages in PDF File: 49

Keywords: Misstatements, Restatements, Earnings Management, Mergers, Acquisitions

JEL Classification: G14, G34, M41, M43

working papers series


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Date posted: March 27, 2012  

Suggested Citation

Kravet, Todd D. and Myers, Linda A. and Sanchez, Juan Manuel and Scholz, Susan, Do Financial Statement Misstatements Facilitate Corporate Acquisitions? (March 27, 2012). Available at SSRN: http://ssrn.com/abstract=2029953 or http://dx.doi.org/10.2139/ssrn.2029953

Contact Information

Todd D. Kravet
University of Texas at Dallas - Naveen Jindal School of Management ( email )
800 West Campbell Road
Richardson, TX 75080-3021
United States
Linda A. Myers
University of Arkansas ( email )
Fayetteville, AR 72701
United States
Juan Manuel Sanchez
Texas Tech University ( email )
Lubbock, TX 79409
United States
Susan Scholz (Contact Author)
University of Kansas - Accounting and Information Systems Area ( email )
1300 Sunnyside Ave
Lawrence, KS 66045
United States
785-864-7554 (Phone)
785-864-5328 (Fax)
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