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- W3121295657 abstract "Introduction Like any other corporate investment decision, a merger and acquisition (MA Louis 2004; Botsari and Meeks 2008; Gong, Louis et al. 2008; Yung, Sun and Rahman 2013; Higgins, 2013). They argue that managing the acquirer's earnings upwards does usually inflate its share price, therefore lowering the cost of the deal from the acquirer's perspective. Such empirical evidence indicates that managers often succeed in their attempts to influence the reported numbers on paper, with the aim of reducing the firm's cost of capital. However, this evidence per se does not necessarily indicate that the users' perceptions, especially those of the well-informed, are also successfully manipulated. Surprisingly, the validity of the naive investor model has been challenged in IPO and SEO contexts but not within an MA Asano, Ishii et al. 2007; Botsari and Meeks 2008). This paper addresses the question of how earnings management undertaken by a firm is perceived and processed by relevant parties and whether the naive investor hypothesis can be extended to target managers. We investigate both cash and stock acquisition premia and find that bidders who manipulate earnings are unable to obtain a lower acquisition price using overvalued shares in stock deals. Our results support the cynical investor hypothesis, which posits that target management and their financial advisors are suspicious of bidders with low earnings quality and are able to detect and thwart bidder earnings management schemes designed to obtain a lower acquisition price in stock transactions. The paper proceeds as follows. In section 2, we review the relevant literature and develop our hypotheses. In section 3, we describe our data and empirical methods. In section 4, we present our results, and section 5 concludes. Literature Review and Hypotheses INFORMATION ASYMMETRY AND M&A PREMIA An M&A deal is initiated in a market where buyers (i.e., acquirers) seek to buy the assets of sellers (i.e., targets). On each side of the transaction (e.g., the buyer's side and the seller's side) there is one agent (e.g., the management) acting on behalf of passive owners with the motivation of maximizing the owners' wealth (Myers and Majluf 1984). However, the efficiency of managers in decision making creates an agency problem between the current and the new shareholders every time new equity issues are decided upon by a given firm (Jensen and Meckling 1976). …" @default.
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- W3121295657 date "2014-09-22" @default.
- W3121295657 modified "2023-09-23" @default.
- W3121295657 title "Bidder Earnings Management, Cynical Targets and Acquisition Premia" @default.
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