BANKING MERGER

Banking Merger

Banking Merger

Earnings management has attracted considerable academic attention. Popular interest in the issue has been high after accounting frauds at Enron and Worldcom were uncovered. Earnings management is the process of taking deliberate actions within the constrains of general accepted accounting principles (GAAP) so as to bring about a desired level of reported earnings. Alternatively, according to Healy and Wahlen (1999) earnings management:

Background of the Study

There is broad interest in the findings of this research, as the reviews by Schipper (1989), Healy and Wahlen (1999), and Dechow and Skinner (2000) indicate. Focusing a lot on the incentives, managers have to manipulate earnings, many motivations have been put forward in a growing literature.

Justification

One good reason for managers to enter into earnings management would be their remuneration package (Healy, 1985; Gaver et al. 1995). Some researchers have found that earnings management occurs to meet company forecasts (Kasznik, 1999) or analyst forecasts (Burgstahler and Eames, 1998).

Other studies have examined the incentives of managers to manipulate earnings in an attempt to avoid debt covenant constrains (Defond and Jiambalvo, 1994), to smooth income (Moses, 1987), to protect firms from political costs (Liberty and Zimmerman, 1986; Maydew, 1997; Han and Wang, 1998), to protect the ownership control of firms (Perry and Williams, 1994; DeAngelo, 1988), and to influence various capital market participants. Teoh et al. (1998) and Rangan (1998) provide evidence that managers inflate earnings prior to seasoned equity offerings (SEO) and initial public offerings (IPOs), while Kasanen et al. (1996) provide evidence that managers are interested to maintain dividend payout rates at levels where distribution of dividends are of concern.

Purpose of the Study

In takeover or merger settings, Easterwood (1998) and Erickson and Wang (1999) have found evidence of earnings management in both hostile takeovers and in stock for stock mergers.

Objectives of the Study

The objective of the present study is to investigate whether Greek listed acquiring firms manipulate reported earnings in the period prior to the announcement and completion of mergers and acquisitions (M&A). The argument for bidders to manage earnings upward prior to the merger is analogous to that for the targets. If a bidder can increase their share price prior to the transaction, and they use those shares as a medium of exchange, then the manipulation of earnings can affect a lower price for the acquisition.

Examining earnings management in Greece is an issue of great importance after the results presented by two recent international studies - the only two among others that include Greece in their sample. Both studies conclude that earnings management is more pronounced in Greece than in other countries. More specifically Leuz et al. (2003) was based on financial accounting data from 1990 to 1999 for 8,616 non-financial firms from 31 countries, it created four proxies to measure the pervasiveness and to capture a variety of earnings management practices engaged in each country. By means of cluster analysis they grouped countries with similar legal and institutional characteristics into three distinct country clusters to examine systematic earnings management variation across these ...