Bidder Earnings Management, Cynical Targets and Acquisition Premia

Author First name, Last name, Institution

Malek Alsharairi
Kimberly C. Gleason
Yezen H. Kannan

Document Type


Source of Publication

Quarterly Journal of Finance and Accounting

Publication Date



Mergers and acquisitions are the result of negotiations between bidder and target managers and shareholders where both sides have incentives to manipulate the value of shares and assets. While a naive target investor may perceive higher share value for a bidder who engages in income increasing earnings management, an informed target would recognize that the impact of such management is transient. In this paper, we find that non-cash acquirers that adopt income-increasing pre-merger earnings management pay higher acquisition premia in completing their M&A deals. However, there is no significant relationship between earnings management and acquisition premia in cash bids, and evidence suggests that there is no significant incremental impact of bidder earnings management on premia for stock transactions versus cash transactions. Our results support the "cynical investor hypothesis," which posits that target management and its financial advisors are suspicious of bidders with low earnings quality and are able to detect and thwart bidder earnings management schemes designed to obtain a lower acquisition price in stock transactions. The results are counter to the naive investor hypothesis.






M&A, Acquisition Premium, Premia, Cost of Capital, Earnings Management, valuation, stock-swap, cynical investors, bids

Indexed in Scopus


Open Access


Open Access Type

Green: A manuscript of this publication is openly available in a repository