Bidder Earnings Management, Cynical Targets and Acquisition Premia

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 earni...

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Bibliographic Details
Published inQuarterly journal of finance and accounting Vol. 52; no. 1/2; pp. 1 - 40
Main Authors GLEASON, KIMBERLY C., ALSHARAIRI, MALEK A., KANNAN, YEZEN H.
Format Journal Article
LanguageEnglish
Published Creighton UNIVERSITY 01.01.2014
Creighton University
Subjects
Acquired shares
Acquisitions and mergers
Capital market
Cash
Creative accounting
Economic aspects
Financial management
Forecasts and trends
Investors
Price premiums
Prices and rates
Shareholders
Statistical median
Stock shares
Stocks
Target acquisitions
United States
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Summary: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.
ISSN:1939-8123
2327-8250