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Takeover Vulnerability and Pre-Emptive Earnings Management

Tunyi Tunyi Abongeh, Junhong Yang Orcid Logo, Henry Agyei-Boapeah Orcid Logo, Michael Machokoto Orcid Logo

European Accounting Review, Volume: 33, Issue: 2, Pages: 677 - 711

Swansea University Author: Tunyi Tunyi Abongeh

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DOI (Published version): 10.1080/09638180.2022.2116064

Abstract

We explore whether firms that are vulnerable to takeovers pre-emptively manage earnings in anticipation of such events. We find a positive relationship between firms' vulnerability to takeovers and their propensity to manage earnings, mainly through the manipulation of real activities. We consi...

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Published in: European Accounting Review
ISSN: 0963-8180 1468-4497
Published: Informa UK Limited 2024
Online Access: Check full text

URI: https://cronfa.swan.ac.uk/Record/cronfa65018
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Abstract: We explore whether firms that are vulnerable to takeovers pre-emptively manage earnings in anticipation of such events. We find a positive relationship between firms' vulnerability to takeovers and their propensity to manage earnings, mainly through the manipulation of real activities. We consider two motivations for firms' pre-emptive earnings management behavior; (1) to deter future takeovers and (2) to optimize M&A outcomes. Concerning the former, we document evidence consistent with entrenched managers using real earnings management to deter or delay future takeovers. Concerning the latter, we find evidence suggesting that, contingent on receiving takeover bids, vulnerable firms that pre-emptively manipulate real activities extract comparatively higher merger premiums. Overall, our findings suggest that managers of vulnerable firms pre-emptively manage earnings to purposefully delay the timing and optimize the outcomes of prospective takeovers.
Keywords: Takeovers, Takeover vulnerability, Earnings management, Takeover deterrent, Merger premiums
College: Faculty of Humanities and Social Sciences
Funders: We acknowledge financial support from the University of Sheffield (CRAFiC).
Issue: 2
Start Page: 677
End Page: 711

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