Earnings Management Preceding Acquisitions

It is studied whether acquisition targets manage earnings upward prior to transaction. In a sample of 324 targets I find that average working discretionary accruals are higher than expected one year prior to the takeover. The paper also explores whether the magnitude of earnings management depends on auditor characteristics. The results indicated that discretionary accruals are somewhat lower for firms audited by Big 5 auditors, although not significantly so. Firms might have the incentive to switch to higher quality auditors as they are about to be sold since this reduces information asymmetry problems between the firm and prospective buyers. No significant support for this prediction was found, however.