Earnings Management and Acquiring Firms Preceding Acquisitions in Malaysia

Abstract

ABSTRACT The primary objective of the current study is to investigate whether there is any manipulation of accounting earnings through discretionary accrual choices by acquiring firms in the period preceding the announcement and completion of acquisitions. The current study hypothesised that the process of acquisition may provide incentives for managers to make accounting choices that increase the earnings of the firm. By doing so, managers may increase the share price of the firm. The higher the price of the acquisition firm’s share on the agreement date, the fewer the number of shares that must be issued to purchase the target firms. 125 sample of share acquiring firms and 158 cash acquiring firms were analysed over the period 1991-2000. In addition, 125 industry and size-matched control companies are also selected from the population of non-acquiring firms in that particular year. The control group is used to provide information on how comparable firms, not involved in acquisition from the sample share-acquiring firms. The results in the current study provide evidence that in the year prior to the acquisition, acquiring firms in share for share acquisitions manage earnings upward. The result indicates that acquiring firms in Malaysia use accounting procedures in an attempt to increase their share price prior to share for share acquisition.