Earnings Quality Following Corporate Acquisitions

We use the corporate acquisition setting to examine earnings quality during the post-acquisition period. We define earnings quality as an earnings stream more closely associated with future cash flows from operations. We use the stock market’s reaction at the acquisition announcement to infer merger motives and hypothesize that synergy-motivated acquisitions will produce higher quality earnings than agency-motivated acquisitions. Our findings are consistent with this prediction and support the view that managers who pursue synergy or agency-motivated acquisitions do not face the same economic environment and incentive schemes. Our results are also consistent with the notion that incentives for earnings management are greater following agency-motivated acquisitions when compared to those of synergy-motivated acquisitions. We conjecture that these differences originate from those accounting-based contracts that are likely impacted by reported post-acquisition balance sheet and income statement amounts