Under-performance of listed companies, Real earnings management and M&A: Chinese empirical evidence
Abstract: The purpose of this
paper is to examine whether acquiring firms attempt to adopt real earnings
management strategy to upward reported earnings in the period of M&A
announcement and provide an explanation for the underperformance of
post-M&A in share payment M&A affairs occurring in China’s capital
market from 2008-2010.
Design/methodology/approach: The author uses Roychowdhury’s(2006)
methodology to measure the magnitude of real earnings management of acquiring
firms in stock for stock M&A by exploiting financial date from 2006 to
2011. The methodology includes three models, which are cash ?ow from
operations, production costs and discretionary expenditures, respectively.
Findings: It was found that firms using stock as a financing medium
exhibit significant negative abnormal cash flows and abnormal discretionary
expenses yet abnormal production costs significantly positive during the current
period of M&A. Moreover, it was also documented that acquiring firms use
real activities manipulation to overstate earnings for the purpose of improving
market confidence. Finally, a negative association was found between REM and
under-performance of post-M&A.
Research limitations/implications: To some extent, these results explain
the puzzle of performance decline over the following period of post-M&A.
Meanwhile, our study adds to prior literature that capital market pressures
induce acquiring firms inflate reported earnings by manipulating real
activities in stock-financed M&A occurring in China’s capital market.
Practical implications: The author’s result imply that investors,
analysts and regulators cannot ignore more undetectable opportunism behaviors
underlying reported earnings than accrual-based earnings management and the
impact on the performance of post-M&A when they use financial statements to
evaluate acquiring firms.
Social implications: Our study plays important role in making public policies.
Furthermore, it is necessary to improve outside supervisory mechanism and
strengthen construction of honesty and faithfulness so as to realize the main
purpose of value creation in M&A.
Originality/value: The paper extends prior literature by taking a closer
look at acquiring firms’ managerial myopia behavior in stock-financed M&A.
The administrators of acquiring firms have strong incentives to manage earning
upward by adopting a more subtle way which is a costly means because it has
value-destroying effect on performance of post-M&A.
Author: Ziqiao Zhang
Journal Code: jptindustrigg150040
