Accrual and real-based earnings management and the market performance of UK acquirers

Kassamany, Talie S. (2014) Accrual and real-based earnings management and the market performance of UK acquirers. (PhD thesis), Kingston University, .


The purpose of this study is to investigate the occurrence of pre-merger accrual and real-based earnings management in UK mergers and acquisitions and to examine the effect of these practices on the firm's share performance around the announcement date of the bid. The sample consists of 225 UK public acquirers engaged successfully in merger and acquisition activities between 1990 and 2009. The findings of this study are consistent with those of Erickson and Wang (1999), Louis (2004), and Botsari and Meeks (2008) in providing significant evidence of upward pre-merger accrual-based earnings management by stock-financed acquirers. This study extends its analysis by comparing the magnitude of pre-merger accrual-based earnings management in pre- and post-Higgs periods. The results reveal that stock-financed acquirers in the post-Higgs period show a lower magnitude of pre-merger accrual-based earnings management than that in the pre-Higgs period. The study also examines real manipulation and I find that cash bidders engage in pre-merger real earnings manipulation through lower discretionary expenses, possibly to enhance cash availability for the bid. The results indicate that this is more prevalent in the post-Higgs era. The findings in this study confirm that the recommendations set out in Higgs Report play a crucial role in mitigating accrual-based earnings management activities for UK stock-financed bidders. However, no such evidence is found for real account manipulation. In examining the impact of both accrual and real manipulation on the share performance around the merger announcement date, I find that there is significant positive impact of the pre-merger accrual-based earnings management on the share's performance for UK stock-financed acquiring firms, but not for cash-financed ones. This positive relation is statistically significant for stock-financed acquirers before the Higgs Report period while it is insignificant in the post-Higgs era. I also find that, among the three real earnings management measures (abnormal cash flows from operations, abnormal production costs, and abnormal discretionary expenses), there is a significant positive relation between pre-merger abnormal discretionary expenses and share performance for stock acquirers only. On the contrary, the reduction in discretionary expenses level is associated with an increase in the share value for cash-financing acquirers. Overall, the evidence in this study shows that the effects of real earnings management on the market performance of stock acquirers around the announcement date of the bid are significantly less than the effects of accrual earnings management.

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