An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Kofi Appiah - Okyere
Syracuse University

Abstract: This study provides evidence that target firm managers with high ownership of shares and options tend to report higher levels of accruals and are more likely to report earnings that meet or just beat analysts’ earnings benchmark in the period between deal announcement and deal completion. However, when the parties in a business acquisition use consideration that is contingent on post-acquisition performance, it tends to mitigate managers’ income increasing earnings management. These results are important because they show that in spite of increased public attention on target firms, they still manage earnings in a way consistent with the managers’ equity incentives. Moreover, managers who have several reporting quarters beyond the announcement appear to exercise their greater opportunity to manage earnings. The study also provides an accounting-based explanation for contingent consideration’s ability to reduce acquirers’ misvaluation risk.

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