Acquiring firms' earnings management in stock-for-stock mergers within Korean business groups

PurposeThis study examines acquirers' earnings management in intragroup mergers to investigate whether stock-for-stock mergers between affiliated firms within the same family-controlled business group facilitate the controlling shareholder's rent seeking. Specifically, it investigates the acquiring firm's incentive to inflate premerger-announcement earnings in intragroup mergers given the controlling shareholder's relative equity holdings in the target and acquiring firms. The authors also examine how creditor monitoring affects premerger-announcement earnings in intragroup mergers compared to mergers between independent firms.Design/methodology/approachUsing univariate analysis, panel regression based on accruals and cross-sectional regression based on discretionary accruals, the authors compare earnings management in mergers between affiliated firms with that in mergers between independent firms in the context of Korean business groups. The authors also compare the effects of creditors on earnings management in both cases.FindingsAcquirers' premerger-announcement positive abnormal accruals are less evident in mergers between affiliated firms than in mergers between independent firms. These accruals decrease with high financial leverage only in the latter case, suggesting that creditor monitoring mitigates earnings management only in independent firm mergers.Originality/valueThe authors examine intragroup mergers, unlike previous studies, which focus on unaffiliated firm mergers. They also contribute to the literature on stock-for-stock mergers, showing that lender monitoring can mitigate the acquiring firm's premerger earnings management in unaffiliated firm mergers but not in intragroup mergers. These findings suggest that stock-for-stock mergers between affiliated firms may facilitate the controlling shareholders' rent seeking, which has policy implications for emerging markets with large family-controlled business groups.

Voting in corporations

I introduce a model of shareholder voting. I describe and provide characterizations of three families of shareholder voting rules: ratio rules, difference rules, and share majority rules. The characterizations rely on two key axioms: merger consistency, which requires consistency in voting outcomes following stock‐for‐stock mergers, and reallocation invariance, which requires the shareholder voting rule to be immune to certain manipulative techniques used by shareholders to hide their ownership. The paper also extends May's theorem.

Merger Motives For U.S. Utility Acquirers: Evidence From Performance, Risk Metrics, And Executive Compensation

We study post-acquisition performance of US public utilities that acquired other US exchange listed firms during 1996?2002. We find that acquirer shareholders do not gain any abnormal returns from the acquisition over the two years following the acquisition and there are no unexpected gains in the underlying operating performance of the acquirers. We also find that while stock acquirers show a decrease in post-acquisition performance, their CEO salary increases relative to the industry. This suggests that method of payment may be an important factor in discerning the motivation for an acquisition. Lack of clarity regarding effects of a complex process like an acquisition, for shareholders and perhaps the even the management, combined with potential increase in prestige and salary for the management, may be the motivation for M&A activity in stock mergers. Cash acquirers may be more careful and consequently do not show subsequent underperformance.