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Title: Do acquirers see through the numbers? : earnings management by UK takeover targets
Author: Elrazaz, Tariq
ISNI:       0000 0004 7970 857X
Awarding Body: Loughborough University
Current Institution: Loughborough University
Date of Award: 2019
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The objective of this thesis is to examine accrual and real earnings management in a sample of 131 UK publicly listed targets acquired over the period 1995-2012. Mergers and Acquisitions (M&As) are amongst the most significant investment decisions that firms make. Prior literature shows that earnings management around mergers and acquisitions can have a significant economic impact because of the associated wealth transfers among stakeholders. More importantly, acting on behalf of their shareholders or pursuing their self-interests, managers of both targets and acquirers may be equally motivated to manipulate earnings prior to an acquisition to generate higher gains for their shareholders or themselves. Building on the grounds of information asymmetry, agency conflicts, stewardship theory and the revelation principle, this thesis addresses the question whether takeover targets employ accrual and real earnings management in the periods prior to the announcement of a M&A. Additionally, this thesis examines whether UK acquirers are able to detect targets' earnings management, and in response, adjust the acquisition premium paid downwards in order not to face the risk of overpayment. The research design for the first accrual-based earnings management study uses an aggregate accruals approach in estimating accrual earnings management as proxied by estimated abnormal accruals. Following most of the literature on earnings management, two crosssectional accrual-based models in both their total and working capital accruals variants are utilised, namely: (1) modified Jones model (Dechow et al., 1995), and (2) performance adjusted accruals model (Kothari et al., 2005). The key findings of the first study in this thesis indicate that takeover targets manipulate their earnings using accruals in the second year with an earnings release prior to the announcement of the M&A. Moreover, in partitioning the sample of targets according to the method of payment used in the deal, the results are restricted only to targets of stock-financed deals. These results are consistent with the argument that targets of cash-only or mixed-payment deals do not have the same strong motivations to manage their earnings as their stock-financed deals counterparts do, additionally supporting the findings of prior studies that the method of payment in takeovers is value relevant (e.g., Hansen, 1987; Stulz, 1988; Fishman, 1988; Fishman, 1989; Martin, 1996; Faccio and Masulis, 2005; DePamphilis, 2017). Collectively, the results also indicate a greater reliance on manipulating current working capital accruals as opposed to total accruals. The research design for the second real earnings management study uses various proxies for real earnings management developed by Dechow et al. (1998) and implemented by Roychowdhury (2006), Cohen and Zarowin (2010) and Zang (2012). The key findings of this second study indicate that, on average, UK takeover targets manipulate earnings upwards through cutting discretionary expenses the year prior to the acquisition while they do not do so by manipulating sales or production costs. Moreover, in partitioning the sample of targets according to the method of payment used in the deal, the results are restricted only to targets of stock-financed deals, providing further robustness to the results derived under the accrual-based models. Finally, this study finds evidence suggesting that acquirers are fully aware of the accrualbased techniques employed by takeover targets and can unveil such manipulation practices. In doing so, acquirers attempt to adjust the acquisition premium downwards in order not to face risk of overpayment in the deal. These results are robust to alternative accrual and real earnings management proxies, as well as controlling for the method of payment in the deal.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
Keywords: Business and Management not elsewhere classified ; Mergers and acquisitions ; Takeover targets ; Accrual earnings management ; Real earnings management ; Acquisition premium