Deferred Gratification: Acquirers' Earnings Management During the Interim Period of Acquisitions

Abstract

This study investigates how acquirers manage earnings between an acquisition announcement and deal completion (defined as the interim period of acquisitions). We find that acquirers manage their earnings downwards during this interim period and boost reported earnings in the following period. Our results show that, consistent with managerial incentives for earnings management, there is a negative correlation with earnings surprises, which is higher when announcement returns are lower, and is higher when management compensation is more sensitive to stock price. Further analyses reveal that the acquirer's interim-period earnings understatement does not relate to the likelihood of deal completion. Overall, our study suggests that managers reduce reported earnings during the interim period to boost post-merger earnings, which helps them retroactively justify merger deals.

Keywords: earnings management, mergers and acquisitions, merger announcements, stock-for-stock deals

JEL Classification: G34, G30, M41