Earning management by Canadian acquirers : pre- versus post- IFRS

Abstract

Purpose: This study investigates the occurrence of pre-acquisition accrual-based earnings management for a sample of stock- and cash- financed Canadian acquirers between 2005 and 2015 before and after transitioning IFRS in 2010. Design/methodology/approach: Both parametric (t-test) and non-parametric (Wilcoxon test) tests are used to examine the occurrence of accrual-based earnings management in the year preceding the announcement of acquisition. These are compared across stock and cash acquirers as well as before and after the implementation of the IFRS. Findings: Unlike cash acquirers, the results reveal some evidence of upward pre-acquisition accrual-based earnings management by stock-financed acquirers in order to achieve higher stock market price and lower acquisition costs. Furthermore, significant changes in the post-IFRS period are detected which indicate that the recommendations put forth by IFRS may be successful in mitigating earnings management. Research limitations/Implications: This research provides evidence of the existence of earnings management prior to acquisition announcement and the ability of IFRS to mitigate it. This also might signal mitigation of the agency problem. However, this research faces some limitations. The main limitation is represented by the disproportionate numbers of stock acquirers to cash ones. Moreover, the size of the sample became small because of the exclusion of many observations due to the implementation of several criteria and the missing data from DataStream. Practical implications: The results of this study provide evidence for policy makers on the effectiveness and influence of IFRS. This is also of interest to investors whom might benefit from a more efficient market for investment decisions. Originality/value: Despite the considerable number of studies that have investigated the effectiveness of IFRS on earnings management; the acquirers' tendency to manipulate earnings after the passage of IFRS in Canada remains an unexploited research area. Therefore, the originality of this research is in its contribution to filling a research gap by studying earnings management in the Canadian acquisition market.