Date of Award

Summer 2009

Document Type

Dissertation

Degree Name

Doctor of Business Administration (DBA)

Department

Economics and Finance

First Advisor

Dalia Marciukaityte

Second Advisor

Otis Gilley

Abstract

Earnings management has become a topic of interest when trying to explain anomalies in company stock performance following corporate events such as equity offerings and mergers. If managers are trying to manipulate earnings upward to increase stock value before a merger to achieve a better exchange ratio at acquisition announcement, they may use discretion in accruals to inflate earnings and/or reduce spending in research and development prior to the announcement. Literature results are mixed as to whether firms engage in opportunistic earnings management using discretionary accruals before acquisition announcement and if this manipulation has an impact on stock performance post-announcement. I use three samples, one based on announced mergers involving stock in the payment method, a second based on completed mergers offering a stock swap or stock and cash as consideration, and a third involving cash only merger announcements. I examine these from 1989 to 2005. The announced sample has 697 merger announcements, the completed sample has 577 completed mergers, and the cash only sample has 179 announced mergers. I test opportunistic earnings management and managerial optimism for each of the samples. My review of adjusted discretionary total accruals using cash flow data does not show evidence of upward earnings management but rather downward earnings management before the announcement. Also, patterns in R&D expenses are not supportive of managerial optimism but could lend support to downward earnings management before merger announcement.

Announcing firms have a higher occurrence of litigations and downward earnings restatements following announcement than industry- and performance-matched firms providing some support for opportunistic earnings management, but not supported by the review of accruals or R&D expenses.

A review of managerial optimism using an optimism proxy and R&D expenses does not provide support that the increase in R&D in the year of the announcement is the result of managerial optimism.

Long-run post-announcement stock performance is not significant for the completed mergers sample. The buy-and-hold abnormal returns for the cash only sample of announced mergers is negative and marginally significant 2-years post-announcement and the announced sample has a marginally significant positive abnormal return 12-months post-announcement. The results of this study do not find significant support for the opportunistic earnings management hypothesis; and only minimal support for the managerial optimism hypothesis. The study does provide some evidence of downward earnings management by these firms which could support other hypotheses not addressed in this study.

Download

Share

COinS