Income spring-loading when no one is looking? Earnings management by acquisition targets between takeover announcement and completion

We identify a novel aspect of potential collaboration between targets and acquirers in managing earnings during mergers and acquisitions. Using a sample of 2,128 mergers & acquisitions from 1985-2010, we find that target firms report lower earnings for quarters during the “quiet” period between announcement and completion of these deals. Targets‟ reduced earnings are due mainly to higher expenses (both operating expense and negative one-time items) that are associated with higher cash outflows rather than negative accruals. More importantly, we find that the lower earnings reported by targets during the quiet period is linked to higher earnings reported by the acquirer during the first quarter after the acquisition, and this relation is more evident for acquirers with stock prices that are sensitive to earnings surprises. Our study complements and extends the earnings management literature as well as research studying the interaction between targets and acquirers.