Ownership structure, earnings management and acquiring firm post‐merger market performance

Claude Francoeur, Walid Ben Amar and Philémon Rakoto

International Journal of Managerial Finance, 2012, vol. 8, issue 2, 100-119

Abstract: Purpose - The purpose of this paper is to investigate the link between ownership structure, earnings management (EM) preceding mergers and acquisitions (M&A) and the acquiring firm's subsequent long‐term market performance. Design/methodology/approach - The authors measure the magnitude of discretionary current accruals using two methodologies, that of Teohet al.and that of Kothariet al.The latter methodology is used to control for the presence of extreme performance prior to the event. The calendar‐time Fama‐French three‐factor model was used to evaluate long‐term stock performance and to minimize potential problems related to the cross‐sectional dependence of the returns. Findings - It was found that firms using stock as a financing medium exhibit significant positive discretionary accruals during the year preceding the M&A and during the year of the acquisition. It was also documented that voting right concentration and control‐enhancing mechanisms are not associated with any significant level of earnings management. Finally, a negative association was found between EM and abnormal stock returns over a three‐year period following the acquisition. Research limitations/implications - These results suggest that the concentrated ownership alignment effect dominates the entrenchment motives and acts as a deterrent mechanism to prevent controlling shareholders from managing earnings in stock‐financed M&A. Practical implications - The authors’ results highlight the importance of maintaining good legal and extra‐legal protection of minority shareholders. Regulators can play an important role in preventing dominant shareholders from engaging in opportunistic EM in stock‐financed M&A. Originality/value - The paper extends prior literature by taking a closer look at dominant shareholders’ motivations to manage earnings in stock‐financed M&A. Large shareholders have strong incentives to manage earnings upward prior to stock‐financed transactions to limit the dilution of their controlling position.

Keywords: Canada; Acquisitions and mergers; Corporate ownership; Earnings; Organizational performance; Earnings management; Ownership structure; Post‐merger market performance (search for similar items in EconPapers)
Date: 2012
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:v:8:y:2012:i:2:p:100-119

DOI: 10.1108/17439131211216594

Access Statistics for this article

International Journal of Managerial Finance is currently edited by Dr Alfred Yawson

More articles in International Journal of Managerial Finance from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().