Stock Market Driven Acquisitions, Earnings Management, and Acquirers' Market Performance

     The quality of accounting information and the extent to which financial statements are free from manipulation have always been at the centre of attention of academics and regulators alike. Even more so, in the context of the market for corporate control, where earnings management by acquirers may determine the terms or even the success of a deal, and can have irreversible wealth consequences for acquirer and target shareholders. Analysing deals in the world’s second largest takeover market, the London Stock Exchange, the study documents that acquirers do engage in income-increasing accounting decisions, especially during periods of high market valuations and intense takeover activity, when the pressure to fulfil market expectations and the incentives to manage earnings are greatest. The study then proceeds with addressing the following questions: first, whether acquiring firms succeed in misleading market participants about their underlying performance; and second, whether evidence on acquirers’ long-run underperformance, widely documented in the financial economics literature, could be re-interpreted in light of the reversal of the effects of pre-merger earnings management.