Earnings Management Practice in UK Mergers and Acquisitions

Sri Nilanga Udawatte, Prabhu (2007) Earnings Management Practice in UK Mergers and Acquisitions. PhD thesis, University of Liverpool.

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Abstract

This study investigates the earnings management phenomena in Mergers and Acquisitions (M&A) in the UK. The intention is to provide evidence of the occurrence of earnings management practices prior to the completion of the deal process among acquiring companies that issue shares as the purchase consideration, compared to those that use cash. In addition, the study examines the performance of the share acquirers against cash acquirers. The existing academic literature relating to ,earnings management in US and Australian M&A transactions appears to provide contradictory results. The existing literature for the UK has anaysed the M&A position from a number of perspectives and reported similar results. However, limited research has been carried out for UK M&A from an earnings management perspective. Therefore, this study attempts to bridge the gap by providing evidence of earnings management practice in M&A activities in the UK. By using the accrual model, the results are directly comparable with existing research studies for the US and Australia. The main earnings management detection method used is this study is a modified version of the Jones model developed by Dechow et al (1995). In addition to this, the study investigates detection of earnings management by looking at 'other' measures and attempts to explain the performance of these companies, using ratio analysis. A control sample that uses cash as the purchase consideration is derived to compare the effect of earnings management with that of the main sample that uses shares. The accounting and market data for each company are obtained from Datastream for the time period of 1999 to 2003. The transaction values and the method of payment are gathered from different sources: National Statistics Bureau, Journal Monthly Acquisition and Hemscott premium websites. The results obtained by using the modified Jones model and 'other' measures highlight a positive and statistically significant difference between the share and cash sample. It indicates that in the years prior to M&A, acquiring firms manage earnings upward. It can be argued therefore that, acquiring firms' use accounting procedures in an attempt to increase their stock price, prior to stock for stock merger or acquisition. In addition, ratio analysis reveals that, firms that offer stock significantly under-perform those offering cash. Supplied by The British Library - 'The world's knowledge'

Item Type:	Thesis (PhD)
Depositing User:	Symplectic Admin
Date Deposited:	20 Oct 2023 09:24
Last Modified:	20 Oct 2023 09:37
DOI:	10.17638/03174494
Copyright Statement:	Copyright © and Moral Rights for this thesis and any accompanying data (where applicable) are retained by the author and/or other copyright owners. A copy can be downloaded for personal non-commercial research or study, without prior permission or charge
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3174494