Bidder Earnings Management, Cynical Targets and Acquisition Premia

Alsharairi, M., Gleason, K.C. and Kannan, Y. (2014) “Bidder Earnings Management, Cynical Targets and Acquisition Premia.” Quarterly Journal of Finance and Accounting, 52(1-2): pp. 1-40

41 Pages Posted: 12 May 2016 Last revised: 13 May 2016

See all articles by Malek Alsharairi

Malek Alsharairi

German Jordanian University (GJU)

Kimberly C. Gleason

American University of Sharjah

Yezen H. Kannan

Zayed University; Duquesne University

Date Written: 2014

Abstract

Mergers and acquisitions are the result of negotiations between bidder and target managers and shareholders where both sides have incentives to manipulate the value of shares and assets. While a naive target investor may perceive higher share value for a bidder who engages in income increasing earnings management, an informed target would recognize that the impact of such management is transient. In this paper, we find that non-cash acquirers that adopt income-increasing pre-merger earnings management pay higher acquisition premia in completing their M&A deals. However, there is no significant relationship between earnings management and acquisition premia in cash bids, and evidence suggests that there is no significant incremental impact of bidder earnings management on premia for stock transactions versus cash transactions. Our results support the “cynical investor hypothesis,” which posits that target management and its financial advisors are suspicious of bidders with low earnings quality and are able to detect and thwart bidder earnings management schemes designed to obtain a lower acquisition price in stock transactions. The results are counter to the naive investor hypothesis.

Keywords: M&A, Acquisition Premium, Premia, Cost of Capital, Earnings Management, valuation, stock-swap, cynical investors, bids

JEL Classification: G30, G31, G32, G38

Suggested Citation

Alsharairi, Malek Ahmad and Gleason, Kimberly C. and Kannan, Yezen H., Bidder Earnings Management, Cynical Targets and Acquisition Premia (2014). Alsharairi, M., Gleason, K.C. and Kannan, Y. (2014) “Bidder Earnings Management, Cynical Targets and Acquisition Premia.” Quarterly Journal of Finance and Accounting, 52(1-2): pp. 1-40, Available at SSRN: https://ssrn.com/abstract=2777908

Malek Ahmad Alsharairi (Contact Author)

German Jordanian University (GJU) ( email )

P.O. Box 35247
Amman, 11180
Jordan

HOME PAGE: http://www.gju.edu.jo

Kimberly C. Gleason

American University of Sharjah ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

Yezen H. Kannan

Zayed University ( email )

Zayed University
P.O. Box 144534
Dubai
United Arab Emirates
971-054-997-7750 (Phone)

Duquesne University ( email )

600 Forbes Avenue
Pittsburgh, PA 15282
United States

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