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Do Financial Statement Misstatements Facilitate Corporate Acquisitions?

55 Pages Posted: 27 Mar 2012 Last revised: 5 Aug 2015

Todd D. Kravet

University of Connecticut - Department of Accounting

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Juan Manuel Sanchez

University of Texas at San Antonio

Susan Scholz

University of Kansas - Accounting and Information Systems Area

Date Written: July 28, 2015

Abstract

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

Kravet, Todd D. and Myers, Linda A. and Sanchez, Juan Manuel and Scholz, Susan, Do Financial Statement Misstatements Facilitate Corporate Acquisitions? (July 28, 2015). Available at SSRN: https://ssrn.com/abstract=2029953 or http://dx.doi.org/10.2139/ssrn.2029953

Todd D. Kravet

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Juan Manuel Sanchez

University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

Susan Scholz (Contact Author)

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Ave
Lawrence, KS 66045
United States
785-864-7554 (Phone)
785-864-5328 (Fax)

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