proposal_example[1] - Earnings manipulation by UK companies...

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1 Earnings manipulation by UK companies mounting takeover bids Research aims and objectives The aim of this study is to examine whether UK companies mounting takeover bids, deliberately manipulate their earnings in the pre-bid period to report a more favourable financial performance. The context of takeover bids also invites an analysis of the link between earnings management and stock price performance. The effect of takeover bids on stock returns is one of the most researched empirical issues in finance, but no study has examined the influence of earnings disclosure by bidders before the bid and the effect of this on stock prices. This analysis could help to explain existing evidence on the share price behaviour of bidding firms around bid announcements. In addition to making this original contribution, the proposed research potentially has implications for investors, regulators, and managers. If companies intending to make share financed takeover bids successfully manipulate earnings upwards and the market does not recognise the manipulation then various predictions follow. First, bidding firms should experience positive abnormal returns associated with their most recent earnings announcement before their takeover bids. Second, this result may be weaker for companies mounting cash financed takeover bids since these companies may never have intended a share offer and so would have no incentive to manipulate earnings, or they may have failed to convince the market about their improved earnings. Third, as accounting accruals necessarily must reverse themselves, reported earnings of bidding companies will be lower in post-bid years and these earnings will be associated with negative abnormal returns in the post-bid period. Fourth, both successful and unsuccessful bidders should experience this effect and post-bid stock market performance should not be linked to the takeover per se . Previous research There is substantial evidence on the stock market performance of bidding and acquiring firms in the UK around the dates of takeover bids. In a study covering the period 1977–1986, Limmack (1991) reports significantly positive abnormal returns in the six months before the bid announcement and significantly negative returns in the two years following the outcome
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2 announcement for bidding companies. Gregory (1997) confirms the negative post-bid performance of acquiring companies for the period 1984–1992, and reports that acquisitions made using cash offers are associated with post-merger abnormal returns for the bidder that are insignificantly different from zero, while those made using share offers are associated with significantly negative post-merger abnormal returns. Not all this evidence is undisputed. Franks
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This note was uploaded on 04/10/2011 for the course BMAN 3200 taught by Professor Kei during the Spring '11 term at MD University College.

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proposal_example[1] - Earnings manipulation by UK companies...

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