The role of institutional environments in cross-border mergers : a perspective from bidders’ earnings management behavior
Date of Issue2015
College of Business (Nanyang Business School)
This study examines the effects of targets’ institutional environments on bidders’ earning management behavior around cross-border mergers. Earnings management is a widely used strategy for the bidder to reduce the risk of overpayment and the related costs in mergers. We hypothesize that the extent to which the bidder engages in earnings management differs across the level of uncertainty resulting from the target’s institutional environments such as language, culture, religion, the quality of accounting standards, and political and legal environments. Consistent with our hypothesis, we find that the earnings management behavior of US bidders becomes more evident when they acquire targets from countries with greater institutional differences, such as non-Christian countries, countries with a low level of political stability, countries with a low level of democracy and freedom of the press and media, countries with high corruption and countries with a low level of government effectiveness. Overall, these results suggest that the bidder engages in earnings management to reduce the risk of overpayment arising from uncertainty caused by institutional differences.
Management International review
© 2015 Springer-Verlag Berlin Heidelberg. This is the author created version of a work that has been peer reviewed and accepted for publication in Management International Review, published by Springer-Verlag Berlin Heidelberg. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: [http://dx.doi.org/10.1007/s11575-015-0249-4 ].