Directors’ Recommendations on Takeover Bids and the Management of Earnings: Evidence from Australian Takeovers

Abstract

This article investigates whether Australian companies manage their earnings during takeover bids in a manner consistent with the earnings‐management hypothesis. This hypothesis predicts that directors who reject a bid use accrual accounting to increase current earnings, supporting their claim that the bid, relative to earnings, is inadequate. Likewise, directors who accept a bid are predicted to use accrual accounting to decrease current earnings. Overall, the results are not consistent with the earnings‐management hypothesis. However, some components of unexpected accruals (our proxy for managed earnings) change in the direction predicted by the earnings‐management hypothesis, although these changes are not statistically significant. Using industry adjusted performance measures the conclusion is that unexpected accruals are primarily a manifestation of poor financial performance of target firms in the period leading up to the takeover bid.

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