Acquiring firms' earnings management incentives: evidence from French mergers
Résumé
While prior literature tends to acknowledge that stock-financed mergers provide acquiring firms‟ managers with incentives to artificially improve accounting earnings, the precise reasons that prompt such behaviour have received little attention to date and remain unclear. This study investigates the determinants of earnings management by acquiring firms, by focusing on French statutory mergers, a setting that differs markedly from the US/UK environment and involves specific incentives. Using a simultaneous equations approach, results indicate that the absorbing firms‟ upward earnings management is positively influenced by contextual factors related to French mergers characteristics such as the existence of expected dilutive effects on control and voting rights for dominant shareholders (especially for families/managers controlled firms), deal initiative and deal nature, and negatively affected by the choice to use accounting criteria to set the exchange ratio. By highlighting the broader influence of the mergers domestic regulation on earnings management incentives and suggesting an alternative use of manipulation instruments to influence the exchange ratio, this study sheds new light on managers‟ accounting strategies prior to mergers and acquisitions