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• W1591777368 abstract "INTRODUCTION There is an understanding among many accounting researchers (e.g. Healy 1985, DeAngelo 1986, and Jones 1991) and among users of financial statements that management deliberately manipulates earnings for certain events. (Healy 1985) studies the earnings manipulation assuming that the management compensation plans is the incentive for this action, (DeAngelo 1986) argues that the motivation buyout, and (Jones 1991) assumes that tax relief is the motivation. Earnings manipulation is assumed to be a practice employed by management in pursuit of self-interest either by selecting accounting procedures or by manipulating accruals in order to increase or decrease reported earnings. Certain economic and contractual variables provide an additional incentive for this practice. In addition to afore mentioned studies, (Defond and Jiambalvo 1994) suggest that debt contracts provide management with incentives to manipulate earnings. This approach does not violate the perspective that managers, on average, smooth earnings to enhance their quality. The studies of (Subramanyam 1996) and (Chaney et al 1996), among others, indicate that managers, on average, smooth income to enhance the quality of earnings. (Shubita 2011) reveals mixed results for income smoothing in the Gulf Corporation Council Capital Markets. This study will provide a review of the motivations for earnings manipulation under certain circumstances. The event that will be analyzed is merger and acquisition. The remainder of this study is organized as follows. Section 2 discusses the incentives of managers prior to takeover bids. Section 3 discusses consequences of earnings manipulation for bidder companies. Section 4 presents additional factors to explain earnings manipulation prior to takeover bids. Finally, section 5 contains a summary and conclusions. DISCUSSION OF MANAGERS' INCENTIVE TO MANIPULATE ACCRUALS PRIOR TO TAKEOVER BIDS Acquiring another company can be considered a major strategic decision for the acquiring company. Thus, it requires the management of the acquiring company to prepare in advance before making a decision to undertake a bid. It is unlikely that such an important decision will be undertaken without sound and early planning. Managers of acquiring companies, like all rational managers, seek to minimise the cost of bids as much as possible to benefit their company and its shareholders, as this will reduce the cost of the financing operation. There have been several UK studies, in addition to many other international studies, that have investigated the stock market performance of acquiring companies around takeover bids. (Gregory 1997) examines the long-term performance of UK acquiring companies after a takeover. His results indicate that the post-takeover performance of acquiring companies is unambiguously negative, particularly in the case of equity offers. His explanation for this observation is that acquiring companies use over-valued equity to buy target companies. Further, he contends that share-for-share acquisition is simply one way of issuing over-valued equity to the market. Moreover, (Limmack 1991) shows that bidder companies obtain positive abnormal returns in the six months before bid announcement. On the other hand, bidding companies obtain negative returns for the post-bid period. Further, (Limmack 1991) demonstrates that the outcome of the bid does not have an impact on the trend of the results. In the same vein, (Franks and Harris 1989) show that bidding companies achieve negative returns for the post-bid period. In summary, existing evidence indicates that bidding companies achieve positive abnormal returns in the pre-bid period and negative abnormal returns in the post-bid period, regardless of the outcome of the takeover bid (Limmack 1991). (Dechow et al 1996) found that, among other motivating variables, the most important motivation for management to manipulate earnings is the desire to attract external financing at a low cost. …" @default.
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• W1591777368 date "2012-07-01" @default.
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• W1591777368 title "Earnings Manipulation in Acquiring Companies: An Overview" @default.
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