Earnings management by friendly takeover targets

Abstract

Purpose

Accounting research has emphasized target and bidder managers' incentives to manipulate earnings during corporate control contests. However, prior studies examining earnings management by takeover targets have obtained mixed results. Moreover, the existing evidence is mainly based on US data and hostile mergers and acquisitions (M&A) transactions. The purpose of this study is to examine earnings management by friendly takeover targets in the year preceding the deal announcement in Switzerland.

Design/methodology/approach

The paper examines earnings management practices of a sample of 50 Swiss firms that were targets of a friendly takeover proposition during the period 1990‐2002. Discretionary accruals are used as a measure of earnings management. It uses a matching approach and a cross‐sectional regression analysis to test the hypothesis of earnings management by takeover targets.

Research limitations/implications

The paper expands and provides further international insights to the existing literature through the investigation of earnings management by takeover targets managers in a European setting and in a friendly corporate control environment.

Originality/value

These empirical findings document the existence of a significant downward earnings management during the year preceding the transaction. These results suggest that earnings management incentives may differ between negotiated friendly and hostile disciplinary transactions.

Citation

Ben‐Amar, W. and Missonier‐Piera, F. (2008), "Earnings management by friendly takeover targets", International Journal of Managerial Finance, Vol. 4 No. 3, pp. 232-243. https://doi.org/10.1108/17439130810878811