Earnings management of target firms and deal premiums: The role of industry relatedness

This paper contributes to the merger and acquisitions (M&A) literature by providing evidence for the role of industry relatedness in the association between target firms' earnings management (EM) before the deal and the premium offered by the acquirer. We argue that familiarity with the industry's policies and practices is a crucial factor that helps acquirers to see through targets' EM. Our evidence supports this prediction in relation to accounting manipulation as we observe that the income increasing accrual manipulation of the target results in significantly higher premiums offered by acquirers in interindustry deals, which is not the case when targets and acquirers belong to the same industry.The authors appreciate the comments made on earlier versions of this paper by the participants at the 14th International Accounting Research Symposium, Madrid (Spain) in 2018, the World Finance and Banking Symposium, Taichung (Taiwan) in 2019), the 13th Workshop on Empirical Research in Financial Accounting, Castellón (Spain) in 2019, and the 42nd Annual Congress of the European Accounting Association (EAA), Paphos (Cyprus) in 2019. Any errors are the authors' sole responsibility. This work was supported by: Fundación Carolina, Madrid, Spain [grant number: C.2017]; Ministerio de Ciencia e Innovación, Madrid, Spain [grant number: PID2019-111143GB-C33]; and Universitat Jaume I, Castellón, Spain [grant number: UJI-B2020-26]