Earnings Management and Mergers and Acquisitions

Abstract

This chapter investigates whether Italian-listed companies involved in mergers and acquisitions (M&A) during the period 2009–2017 manipulated earnings through recourse to discretionary accruals in response to financial market competition. Interest in the possible effects of competition on earnings management practices follows the considerable attention attracted by the effects of business combinations on disclosure quality and reliability. M&A represents an opportunity for managers to manipulate financial reports and to deliver misleading market information in order to enhance company reputation and attract funds from investors. This empirical analysis demonstrates that Italian-listed companies involved in M&A used goodwill as a discretionary accrual for managing earnings. The findings indicate that the increasing level of financial market competition between Italian-listed companies prompted major recourse to earnings management practices based on discretionary accruals.