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

Posted: 15 Feb 2008 Last revised: 20 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

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Abstract

There is a positive association between stock-for-stock acquirers' pre-merger abnormal accruals and post-merger announcement lawsuits. The market only partially anticipates the effects of post-merger announcement lawsuits at the merger announcement and post-merger announcement long-term market underperformance is largely limited to litigated acquisitions. Overall, the evidence indicates that lawsuits are a contributing factor to post-merger announcement long-term underperformance, which is an important finding, given the puzzling nature of the underperformance and the heightened interest in explaining this phenomenon. The evidence also 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

Suggested Citation

Gong, Guojin and Louis, Henock and Sun, Amy X., Earnings Management, Lawsuits, and Stock-for-Stock Acquirers' Market Performance. Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1092571

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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