Review of Business and Economic Literature vol:58 issue:3 pages:230-259
Corporate accounting scandals over the last two decades have shown that managers who are eager to expand the size of their company use accepted accounting techniques to infl ate their earnings prior to an acquisition. Th is article reviews the literature on earnings management by acquirers. Overall, this literature has shown that considerable manipulations of earnings take place preceding the announcement of a takeover deal. Moreover, larger deals tend to be associated with more earnings management, as evidenced by a positive and significant
association between relative deal size and acquirer discretionary accruals. Finally, earnings
management is also associated with lower abnormal stock performance around an M&A announcement, while the negative association between pre-acquisition earnings management
and long-term abnormal stock performance suggests that investors are unable to adequately off set the effects of earnings management upon M&A announcement.