Growing the Firm – Academic Article – Misreporting Following Mergers and Acquisitions Transactions

Article: Does Investment-Related Pressure Lead to Misreporting? An Analysis of Reporting Following M&A Transactions written by Bens, Daniel A., Theodore H. Goodman, and Monica Neamtiu.  

The purpose of this article is to study whether managers misreport a firm’s financial statements after an M&A transaction. This article suggests that managers feel more pressure to report positive performance for the company after what has been perceived as a bad M&A transaction. Managers feel pressure because M&A transactions could be the biggest decision about a company that managers make in their careers. Managers could be facing their own termination if shareholders see the M&A transaction as having been negative for the company. This leads them to worry about the future of their career, leading the manager to misreport about the firm’s performance the period following an M&A transaction. This study says that it will, “Analyze manager’s tendency to issue materially misstated financial accounting statements (i.e., financial statements that violate GAAP)” (Bens and Goodman 2012). 

This topic is important because from this study we see that shareholders are being given incorrect information about the firm’s performance. And sometimes that incorrect information is being given intentionally by managers. It is very important that shareholders know and understand that this is a possibility for their reports. And managers should take a closer look at their reports and do the right thing.

This article tests the hypothesis stated as, “Acquirers who face high levels of investment-related pressure are more likely to misreport their financial statement in the post-M&A period (Bens and Goodman 2012).” This study test a couple of theories, one of them is whether managers who will be given compensation in the form of stock options have more incentive to misreport financial statements. There was a study done that found that there was actually less misreporting in firms where CEOs had more of these incentives (Armstrong and Jagolinzer 2010). The study also tests whether managers were actually able to obtain a reward from misreporting on financial statements. Although managers will most likely be reprimanded when the misreport is found they would have already gained some sort of reward from it. And shareholders are less likely to see the M&A transaction as a bad decision on the manager’s part.

The study found that there is higher misreporting of financial statements when a manager is being pressured to generate positive earnings after making a bad M&A decision than a firm who had positive reviews. It found that managers will face penalties for having misreported and will most likely be let go but only after gaining some rewards that resulted from the misrepresentation and extending their stay at the company.

Managers must realize that they will be reprimanded for misreporting the firm’s financial statements. This could hurt their career even more than just the fact that they made a bad M&A transaction. The study also found that there was higher manager turnover in companies that misreported financial statements following a poorly received M&A transaction. And lower manager turnover in companies that reported the correct information and were optimistic about the future of the firm following a poorly received M&A transaction. Managers should think twice before reporting false information that affects their shareholders.

Sources:

Bens, Daniel A., Theodore H. Goodman, and Monica Neamtiu. "Does Investment-Related Pressure Lead To Misreporting? An Analysis Of Reporting Following M&A Transactions." Accounting Review 87.3 (2012): 839-865. Business Source Complete. Web. 8 July 2012.

Armstrong, Christopher S., Alan D. Jagolinzer, and David F. Larcker. "Chief Executive Officer Equity Incentives And Accounting Irregularities." Journal Of Accounting Research 48.2 (2010): 225-271. Business Source Complete. Web. 8 July 2012.