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Do Acquiring Firms Manage Earnings?

46 Pages Posted: 29 Sep 2008 Last revised: 25 May 2009

Raunaq S. Pungaliya

Sungkyunkwan University (SKK) Graduate School of Business

Anand M. Vijh

University of Iowa - Department of Finance

Date Written: May 22, 2009


We investigate possible earnings management by inflating discretionary accruals in a sample of 1,719 cash acquirers and 895 stock acquirers during 1989-2005. Following previous literature, we document higher ROA-matched discretionary accruals for stock acquirers than for cash acquirers. However, simulation evidence with quarterly data shows that ROA-matched discretionary accruals are misspecified for both high-growth and low-growth firms. This is relevant to the current investigation because the median sales growth rate equals 12.1% for cash acquirers and 38.5% for stock acquirers (besides similar differences in other growth measures). We propose a new discretionary accrual measure that controls for both ROA and sales growth. This measure is well-specified and powerful in detecting earnings management in stratified random samples, and it leads to an insignificant difference between discretionary accruals of cash and stock acquirers. Other tests of acquirer incentives to manage earnings, market reaction to earnings management, and time delay between earnings announcement and merger announcement strengthen the evidence against earnings management attributed to stock acquisitions.

Keywords: Earnings management, mergers, acquisitions, discretionary accruals, abnormal accruals, sales growth, accounting fraud

JEL Classification: G34, M41, M43, G24, G14

Suggested Citation

Pungaliya, Raunaq S. and Vijh, Anand M., Do Acquiring Firms Manage Earnings? (May 22, 2009). Available at SSRN: or

Raunaq S. Pungaliya (Contact Author)

Sungkyunkwan University (SKK) Graduate School of Business ( email )

53 Myeongnyun-dong 3-ga Jongno-ju
Seoul, 110-745
Korea, Republic of (South Korea)

Anand M. Vijh

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States
319-335-0921 (Phone)
319-335-3609 (Fax)

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