Acquiring to Sell : Evidence on Earnings Management by Acquisition Flippers

Focusing on “flipped” acquisitions, in which an acquirer buys and owns a target for a certain period of time and then resells the target to another company, we investigates whether firms engaging in flipping targets tend to inflate targets’ earnings rather than improving targets’ fundamentals. We find evidence that flipped targets’ earnings are more likely to be overstated compared to non-flipped targets. Specifically, subsequent acquirers of flipped targets are more likely to restate earnings during the post-acquisition period. In addition, flipped targets tend to have a high level of abnormal accruals, lay off employees, cut discretionary expenditures as well as engage in overproduction to boost earnings. Moreover, we find that flipped targets’ earnings management is detrimental to subsequent acquirers as evidenced by subsequent acquirers experiencing larger declines in operating performance and having a higher likelihood of goodwill impairments than acquirers of non-flipped targets.