Three essays on mergers and acquisitions and earnings management in europe

Resumen

The general objective of the thesis is to analyze how bidders include the earnings management (EM) by target firms into the deal negotiations in Europe, particularly when setting the terms of the M&As, such as the bid premiums and the percentage to acquire. Three specific objectives are proposed to achieve that. Firstly, the thesis analyzes the context of M&As in Europe to understand better the European market of corporate control. Secondly, the research examines the relation between the EM of targets and the premiums offered by acquirers, at deal announcements, and the role of the industry relatedness between firms involved in the deal. Thirdly, the study examines the association between the EM of targets and the ownership decision made by acquirers at deal announcements. Results show that the market of M&As in Europe exhibit many idiosyncrasies compared to US market of M&A, such as the overwhelming presence of friendly deals, low rate of transactions using cash as the payment method, as well as low competition to acquire targets. Moreover, evidence indicates that the relation between the EM of targets and the bid premiums could be positive or negative, depending on the industry relatedness between acquirers and targets. We posit that this is because acquirers with backgrounds in the target's industry, particularly in their accounting practices, are more able to detect and discount from the offered price the EM in financial reports compared to other cases. Finally, evidence also indicates that acquirers opt to be cautious when deciding about the percentage of the equity to acquire if the due diligence unveils signs of EM by targets that might be associated with target overvaluation. Then, bidders are more prone to bid for minority and partial acquisitions rather than to full acquisitions, the higher the level of EM by the targets before the deal announcement.