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

Spring-loading future performance when no one is looking? Earnings and cash flow management... 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

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

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Publisher
Springer Journals
Copyright
Copyright © 2016 by Springer Science+Business Media New York
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-016-9365-z
Publisher site
See Article on Publisher Site

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.

Journal

Review of Accounting StudiesSpringer Journals

Published: Jun 24, 2016

References

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