Earnings Management of Target Firms and Deal Premiums: The Role of Industry Relatedness

Abstract

This paper contributes to the merger and acquisitions (M&A) literature by providing evidence on the role of industry relatedness in the association between the earnings management (EM) practices of the target firm before the deal and the premium offered by the acquirer. We argue that familiarity with accounting policies and practices of the industry is a crucial factor that helps acquirers to see through the targets’ EM practices. Our results support this prediction since we observe that the association between the target’s signed discretionary accruals and the premium offered is negative (positive) in intra-industry (inter-industry) M&A.

Keywords: Mergers and Acquisitions (M&As), Earnings Management (EM), Bid Premiums, Industry Relatedness

JEL Classification: G34, M41