The study investigates whether acquiring firms from India indulge in earnings management (EM) up to three years prior to M&A deal announcements. The study also analyzes the EM behavior of acquiring firms compared to their matched non-acquiring firms.
The study considers 1,024 completed M&A deals by Indian acquiring firms, announced between January 2000 and March 2023. The study measures EM using both accrual earnings management (AEM) and real earnings management (REM). The matched non-acquiring firms are obtained by applying the propensity score matching (PSM) technique.
The study finds evidence of both AEM and REM by firms in the financial year leading up to the deal announcement. Further, acquiring firms demonstrate a preference for AEM over REM compared to matched non-acquiring firms. Overall, the findings indicate that M&As are a significant force driving firms to manipulate earnings as they approach deal announcements. The analyses also show that EM is more prevalent among firms participating in intra-industry deals and cross-border deals. The results remain consistent with alternative proxies for AEM and REM. Additionally, the study finds that while acquirers experience positive short-term market returns, these gains reverse in the long run.
The findings have implications for users of financial information in assessing financial risks and for regulators in making stringent policies that ensure transparency.
The study underscores the evolving strategic behavior of firms from a significant emerging economy, potentially influenced by hubristic tendencies and managerial myopia.
