Earnings Management, Lawsuits, and Stock-for-Stock Acquirers' Market Performance

47 Pages Posted: 18 Jan 2008 Last revised: 14 Apr 2008

See all articles by Guojin Gong

Guojin Gong

Penn State University - Smeal College of Business

Henock Louis

Pennsylvania State University - Smeal College of Business

Amy X. Sun

University of Houston

Multiple version iconThere are 2 versions of this paper

Date Written: January 2008

Abstract

There is a positive association between stock-for-stock acquirers' pre-merger abnormal accruals and post-merger lawsuits. The probability of lawsuits is also negatively associated with both the market reaction to the merger announcement and the post-merger announcement long-term abnormal returns, indicating that the market only partially anticipates the effects of post-merger announcement lawsuits. Not only are post-merger lawsuits associated with post-merger underperformance, but they are also likely drivers of the underperformance. The study suggests that it is important that investors not only undo the direct stock price effects of earnings management but also factor the contingent legal costs associated with earnings management.

Keywords: Stock-for-stock merger, earnings management, lawsuit, market efficiency

JEL Classification: G14, G34, M41, M43, K22

Suggested Citation

Gong, Guojin and Louis, Henock and Sun, Amy X., Earnings Management, Lawsuits, and Stock-for-Stock Acquirers' Market Performance (January 2008). Available at SSRN: https://ssrn.com/abstract=1085019 or http://dx.doi.org/10.2139/ssrn.1085019

Guojin Gong

Penn State University - Smeal College of Business ( email )

University Park, PA 16802
United States
814-863-7055 (Phone)

Henock Louis (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802-3306
United States
814-865-4160 (Phone)
814-863-8393 (Fax)

Amy X. Sun

University of Houston ( email )

Bauer College of Business
334 Melcher Hall, 390H
Houston, TX 77204
United States
7137435682 (Phone)

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