Spring-loading future performance when no one is looking? Earnings and cash flow management around acquisitions

Shuping Chen (), Jake Thomas () and Frank Zhang ()
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Shuping Chen: University of Texas at Austin
Jake Thomas: Yale University
Frank Zhang: Yale University

Review of Accounting Studies, 2016, vol. 21, issue 4, No 3, 1115 pages

Abstract: Abstract We find evidence that performance—reflected in earnings and cash flows—is transferred from targets to acquirers around acquisitions. Using a sample of 2128 completed deals from 1985 to 2010, our results suggest that targets depress performance when investor attention declines once the deal parameters are set, and much of that performance understatement is transferred to boost post-acquisition acquirer performance. Evidence of variation across subsamples provides additional confirmation: transfers are more visible for large deals (with transfers large enough to be detected) and muted for pooling transactions (with lower incentives to transfer). We contribute to the earnings management literature by showing that earnings and cash flows are transferred not just within firms but also across firms, and to the mergers and acquisitions literature by documenting that performance is managed not only before but also after deals are announced.

Keywords: Earnings management; Cash flow management; Merger and acquisition; Accruals (search for similar items in EconPapers)
JEL-codes: G34 M41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s11142-016-9365-z

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