Research
Publication details
Alsharairi, M. & Salama, A. (2012). Does High Leverage Impact Earnings Management?: Evidence from Non-cash Mergers and Acquisitions. Journal of Financial and Economic Practice 12(1): 17-33.- Publication type: Journal papers: academic
- ISSN/ISBN: 1937-6820
- Keywords: Earnings management, Leverage, Accruals, Mergers and acquisitions.
- View online: Online version
- Durham research online: DRO record
Author(s) from Durham
Abstract
Using a sample of US noncash
acquirers, we find significant evidence of upward earnings
management prior to announcing merger and acquisition deals. In this event study, we adopt an
industryadjusted
leverage proxy. No evidence of premerger earnings management is found in
highly leveraged firms. The results indicate significant evidence of a negative relationship
between earnings management and leverage. The evidence remains robust after replacing the
leverage proxy with a highlow
leverage binary variable, as well as after controlling for the
relative size of the deal and profitability of acquirers. No evidence on earnings management by
cash acquirers is reported. These findings are consistent with Jensen’s Control Hypothesis as well
as advocate the view that creditors play crucial roles in monitoring the firm, which would
increase the credibility of corporate reports and restrict the use of management’s discretionary
power to manipulate earnings prior to special business events such as mergers and acquisitions.