Earnings quality of private target firms in merger and acquisition setting: evidence from Swedish context

Abstract

Earnings quality of target firms under Merger & Acquisitions (M&A) has attracted academic research increasingly, mostly around the topic of how the earnings quality of target firms affect the transaction process and outcomes. The vibrant capital market in Sweden and its attraction to private firms further motivates this study. To conduct our study, we constructed two groups of firms, one group of 491 target firms acquired by Swedish listed firms from 2009 to 2019 and the other control group 491 matching firms with the same industry and similar size to each of the target firms. We use earnings management to measure earnings quality in this study. Through probit regressions and Ordinary Least Squares (OLS) regressions, we find that target firms do not show clear evidence of accrual-based earnings management, whether being acquired by same-industry (intra-industry) buyers or different-industry (inter-industry) buyers. On the contrary, they show a significantly higher level of real earnings management (REM), in particular, around sales and/or production. Regarding the determinants of earnings management, we did not find strong evidence of impact from transaction synergy or payment method to support or contradict with our hypothesis likely due to the limitations in this study. However, the results show evidence of impact from Big 4 auditors, which appear to be able to constrain target firms’ earnings management behavior. This paper aims to contribute to the existing literature as it uses a unique dataset from Swedish private firms under M&A settings, which has rarely been investigated in Sweden.