Do Financial Statement Misstatements Facilitate Corporate Acquisitions?
55 Pages Posted: 27 Mar 2012 Last revised: 5 Aug 2015
Date Written: July 28, 2015
We provide evidence suggesting that managers use financial statement misstatements which improve reported results to facilitate acquisitions. Specifically, we find that firms misstating their financial statements are more likely to make stock-based acquisitions, but not cash-based acquisitions, after the start of the misstatement. In addition, misstatements classified as errors are not associated with stock-based acquisitions. We also find that managerial overconfidence and entrenchment are associated with managers making acquisitions after misstatements. Stock price reactions to restatement announcements are more negative, by 770 basis points on average, when stock-based acquisitions were made during the misstatement period, and these acquisitions are significantly more likely to result in goodwill impairments than are stock-based acquisitions made during non-misstatement periods. Collectively, these results suggest that managers exploit earnings overstatements to facilitate acquisitions and these acquisitions are largely value destroying.
Keywords: Misstatements, Restatements, Earnings Management, Mergers, Acquisitions
JEL Classification: G14, G34, M41, M43
Suggested Citation: Suggested Citation