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Buying Growth: Low Quality Earnings
as a Motivation for Acquisitions
Patricia Fairfield, Georgetown University
Lee Pinkowitz, Georgetown University
Vicki Wei Tang, Georgetown University
ABSTRACT. We hypothesize that firms engaged in aggressive accounting have incentives to make acquisitions to delay or mask the earnings consequences of aggressive accounting. We find that firms with low quality earnings make more acquisition bids than firms with high quality earnings. We also find that characteristics of the acquisition for low quality firms are consistent with the acquiring firm having a strong motivation to complete the acquisition and to avoid extensive public disclosure of the acquisition details. Finally we find that low quality firms allocate more of the purchase price to goodwill and intangible assets, thus increasing the likelihood that future “pro-forma” earnings will manifest earnings growth.
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