Acquiring to Sell: Acquisition Flippers and Earnings Management

This study documents an interesting phenomenon that some acquirers act like “house flippers” in the capital market. They buy and own targets for a relatively short period of time and then resell targets to other companies for profit. Given the short investment horizon of these flippers, they may inflate targets’ earnings to boost resale value rather than improving targets’ fundamentals over a longer period of time. Using a matched sample of flipped and non-flipped acquisitions, we find evidence that flipped targets’ earnings tend to be overstated. Specifically, subsequent acquirers of flipped targets are more likely to restate earnings downward post-acquisition than acquirers of non-flipped targets. In addition, flipped targets have a high level of abnormal accruals and tend to lay off employees, cut discretionary expenditures, and engage in overproduction to boost earnings compared to non-flipped targets. Furthermore, flipped targets’ earnings management is detrimental to subsequent acquirers as evidenced by subsequent acquirers experiencing larger declines in operating performance, having a higher likelihood of goodwill impairment, and being less likely to acquire flipped targets in the future than acquirers of non-flipped targets. Overall, we identify opportunistic behavior by acquisition flippers that is not in the best interests of targets and subsequent acquirers.