Do Financial Statement Misstatements Facilitate Corporate Acquisitions?

Todd D. Kravet
University of Connecticut – Department of Accounting

Linda A. Myers
University of Tennessee, Knoxville

Juan Manuel Sanchez
Texas Tech University

Susan Scholz
University of Kansas – Accounting and Information Systems Area

July 28, 2015

Abstract:

We provide evidence suggesting that managers use financial statement misstatements which improve reported results to facilitate acquisitions. Specifically, we find that firms misstating their financial statements are more likely to make stock-based acquisitions, but not cash-based acquisitions, after the start of the misstatement. In addition, misstatements classified as errors are not associated with stock-based acquisitions. We also find that managerial overconfidence and entrenchment are associated with managers making acquisitions after misstatements. Stock price reactions to restatement announcements are more negative, by 770 basis points on average, when stock-based acquisitions were made during the misstatement period, and these acquisitions are significantly more likely to result in goodwill impairments than are stock-based acquisitions made during non-misstatement periods. Collectively, these results suggest that managers exploit earnings overstatements to facilitate acquisitions and these acquisitions are largely value destroying.

Do Financial Statement Misstatements Facilitate Corporate Acquisitions?

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