Earning Management and M&A method of payment- Case of Taiwan Corporate Takeover

There are various motivations which encourage the management of the firm to do earning management. In this thesis we discuss the earning management before merger and acquisition activities happen. Before issuing shares to buy target firm , acquirers usually did earning management upward and therefore indirectly affect their stock price up to reduce shares issued. Reducing shares issued can lower the cost of acquisition by avoid earning per share dilution and overpayment for synergy. This thesis discuss whether this situation exist in Taiwan capital market. The focus is on discretionary accruals as a measure of managers’ earnings manipulation. To estimate discretionary and non-discretionary components of total accruals the modified Jones model is adopted Firms are selected from both listed cash and share acquirers firms on Taiwan capital market in the period of 2002-2011 which contain 695 samples. After filtering samples, we categorize by method of payment into shares purchase with 121 samples and cash purchase with 308 samples. The results indicated strong evidence that share acquirer firms manipulated their earnings preceding acquisition announcement date. Cash acquirers shows no evidence of earning management.