Real Activities Manipulation: Insights from Target Companies in M&A

Abstract

Earnings manipulation has long been a subject of debate in financial reporting, particularly in contexts where firms face incentives to present inflated or smoothed earnings figures. Mergers and acquisitions (M&A) provide one such scenario, as target firms attempt to position themselves as attractive candidates to prospective acquirers. This research examines the phenomenon of real earnings manipulation surrounding M&A, with particular attention to the perspective of the target firms. Drawing from empirical evidence, this study investigates whether target firms engage in aggressive earnings management through operational adjustments rather than purely accounting-based accrual manipulations. Using panel data from a sample of M&A transactions across multiple industries, the findings suggest that targets systematically increase discretionary expenses, manipulate production levels, and alter sales timing in the periods preceding M&A announcements. The results demonstrate that such real activities manipulation provides temporary earnings boosts that mislead acquirers but often diminish long-term value. The study concludes that while these practices may increase the acquisition likelihood or valuation premiums, they pose significant risks to post-merger performance and raise ethical concerns in financial reporting.