Accruals-based and real earnings management surrounding mergers and acquisitions in Brazil
Abstract
We have verified whether Brazilian publicly traded companies carry out earnings management by operating decisions at the expense of accruals-based earnings management in the periods of mergers and acquisitions (M&A). In this regard, we have analyzed a sample of non-financial firms listed on the Brazilian Stock Exchange (B3) from 2009 to 2017. To meet the proposed objective, two hypotheses were tested: H1 - Target companies and acquiring companies have a higher level of earnings management by accruals during periods of M&A and H2 - Target companies and acquiring companies have a higher level of earnings management by operational decisions during M&A periods. We calculate real earnings management based on Roychowdhury model and the accruals earnings management based on modified Jones model. We use Pooled Ordinary Least Squares, fixed effects and random effects methods. Our findings indicate that during M&A periods acquiring firms manage their earnings by operational decisions related to overproduction and target firms manage their earnings by sales manipulation. Additionally, the results also suggest that to save on the cost of acquiring the target company, managers of acquiring companies that follow the strategy of carrying out M&A using shares as a form of payment tend to temporarily overvalue the price of their shares by means of earnings management by accruals. However, it was not possible to state that M&A involving payment in shares encourages the management of results by operational decisions by the acquiring companies. The study expands the literature, empirically validating the evidence of earnings management by operational decisions in specific M&A events in Brazil. In addition, it analyzes the trade-off between accrual management and operational decisions in an emerging country, considering that a scenario with less investor protection tends to offer greater incentives to manipulate results.
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