The Method of Payment in Takeovers and Earnings Management

Abstract

This paper tests whether acquiring and target firms attempt to increase reported earnings prior to a stock for stock merger. Using a modified Jones model, discretionary accruals are examined for a sample of 298 mergers of publicly traded Japanese firms that were announced and agreed between 1999 and 2006. Findings indicate that discretionary accruals are positive and statistically significant for acquiring firms and target firms in a stock for stock merger. The results from the empirical tests indicate that acquiring and target firms’ managers manage earnings upward prior to the merger. This paper also tests whether acquiring firms create synergy to add economic values, but I can’t find the different synergy effect for the method of payment.