Earnings Management in Firms Seeking to Be Acquired

64 Pages Posted: 22 Jul 2014 Last revised: 4 Dec 2015

See all articles by Seraina C. Anagnostopoulou

Seraina C. Anagnostopoulou

University of Piraeus, Department of Banking and Financial Management

Andrianos E. Tsekrekos

Athens University of Economics and Business - Department of Accounting and Finance

Date Written: July 21, 2014

Abstract

Empirical evidence regarding accrual-based earnings management around mergers and acquisitions has been setting-specific as far as target firms are concerned. This might be due to the fact that target firms cannot always anticipate an acquisition proposal, and thus lack the motive and the time necessary to manage their earnings in order to facilitate or impede the deal. In this paper, we provide clear evidence of downward earnings management by a sample of target firms that have both time and motive to engage in such actions. These are firms that publicly announce their intention to be acquired. Publicly ‘seeking a buyer’ represents a rather unusual corporate event, and we find that these firms engage in downward earnings management in the years surrounding the ‘announcement year’. To some extent, this result is explained by overrepresentation of low performance and growth among these firms, and it can be interpreted under alternative explanations. Furthermore, we show that such downward earnings management negatively affects the probability for a ‘seeking buyer’ firm to secure an acquisition within a reasonable amount of time, a possible indication of efficient diligence by prospective buyers having a preference for firms ‘seeking buyer’ with no informationally obscure earnings.

Keywords: acquisition targets, takeovers, earnings management, income manipulation

JEL Classification: M41, G34

Suggested Citation

Anagnostopoulou, Seraina C. and Tsekrekos, Andrianos E., Earnings Management in Firms Seeking to Be Acquired (July 21, 2014). The British Accounting Review, vol. 47, no. 4, pp. 351-375, 2015. Available at SSRN: https://ssrn.com/abstract=2469114

Seraina C. Anagnostopoulou (Contact Author)

University of Piraeus, Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
Piraeus, 18534
Greece

Andrianos E. Tsekrekos

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

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