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Spring-Loading Future Performance When No One is Looking? Earnings and Cash Flow Management Around Acquisitions

49 Pages Posted: 27 Jul 2011 Last revised: 29 Nov 2015

Shuping Chen

University of Texas at Austin - Red McCombs School of Business

Jacob K. Thomas

Yale School of Management

Frank Zhang

Yale School of Management

Date Written: November 28, 2015

Abstract

We find evidence that performance — reflected in earnings and cash flows — is transferred from targets to acquirers around acquisitions. Using a sample of 2,128 completed deals from 1985-2010, our results suggest that targets depress performance when investor attention declines once the deal parameters are set, and much of that performance understatement is transferred to boost post-acquisition acquirer performance. Evidence of variation across subsamples provides additional confirmation: transfers are more visible for large deals (with transfers large enough to be detected), and muted for pooling transactions (with lower incentives to transfer). We contribute to the earnings management literature by showing that earnings and cash flows are transferred not just within firms but also across firms, and to the mergers and acquisitions literature by documenting that performance is managed not only before but also after deals are announced.

Keywords: Earnings management, cash flow management, merger and acquisition, accruals

JEL Classification: C71, G31, G34, M41

Suggested Citation

Chen, Shuping and Thomas, Jacob K. and Zhang, Frank, Spring-Loading Future Performance When No One is Looking? Earnings and Cash Flow Management Around Acquisitions (November 28, 2015). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1895473 or http://dx.doi.org/10.2139/ssrn.1895473

Shuping Chen

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States
521.471.5328 (Phone)

Jacob Kandathil Thomas

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Frank Zhang (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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