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Real earnings manipulation surrounding mergers and acquisitions: the targets’ perspective
Faculty
Commerce
Year:
2021
Type of Publication:
ZU Hosted
Pages:
429-451
Authors:
Yousry Ali Ali Sayed Ahmed
Journal:
International Journal of Accounting & Information Management Emerald
Volume:
29
Keywords :
Real earnings manipulation surrounding mergers , acquisitions:
Abstract:
Purpose: This paper investigates whether UK public targets manage their earnings using real activities manipulation in the period prior to the announcement of a merger and acquisition (M&A). It also examines whether the payment method in M&As affects the degree to which takeover targets manipulate earnings. Design/methodology/approach: Using a sample of 131 UK listed targets acquired over the period 1995-2013, this paper examines real earnings management (REM) by employing OLS regression models. The data related to deals have been mainly collected from Thomson One Banker and Thomson Reuters Eikon databases. Real earnings management is examined by investigating abnormal cash flow from operations, abnormal discretionary expenses and abnormal production costs. This analysis was supplemented by conducting additional robustness checks. Findings: The results show that UK takeover targets manage earnings upwards through cutting discretionary expenses in the year prior to the acquisition, while they do not do so by manipulating sales or production costs. Moreover, targets of cash-only or mixed-payment deals do not have the same strong motivation to manage their earnings as stock-financed deal target counterparts do. Our results continue to hold after using alternative accrual earnings management measures, controlling for unobservable firm heterogeneity using the fixed-effect model, and controlling for endogeneity using the two-stage Heckman (1979) model. Originality: As far as the literature on earnings management (EM) around M&As is concerned, only accruals earnings management by acquirers has been examined, and not much attention has been paid to targets’ EM. Practical implications: The main findings of this study could be beneficial for various parties involved M&As, such as standard setters and regulators. A need arises to improve disclosure rules and enhance overall financial reporting quality in the capital markets with the aim of reducing information asymmetry and agency conflicts.
Author Related Publications
Yousry Ali Ali Sayed Ahmed, "On the likelihood and type of merger and acquisition in the US listed companies: the role of females on the board", Emerald, 2022
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Yousry Ali Ali Sayed Ahmed, "Corporate failure in the UK: An examination of corporate governance reforms", Elsevier, 2022
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Yousry Ali Ali Sayed Ahmed, "Does family ownership matter? Evidence of the payment method and market reaction to M&A deals in Taiwan", Emerald, 2023
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Yousry Ali Ali Sayed Ahmed, "Stock price informativeness of risk disclosure: Does time orientation matter", Elsevier, 2023
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Yousry Ali Ali Sayed Ahmed, "Is expanded auditor reporting meaningful? UK evidence", ELsevier, 2023
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