Earnings Management and Stock for Stock Mergers

Abstract

This study investigates the relationship between stock for stock mergers and three earnings management methods: (1) accrual-based earnings management; (2) real earnings management; and (3) misclassification of items within the income statements. The findings show that stock for stock merger firms in the year of mergers are more likely to use accrual-based and real earnings management instead of classification shifting. In addition, this study develops an aggregate earnings quality index and compares future operating and stock market performance based on the earnings quality index.