Effects of director networks on acquiring firms' earnings management prior to M&A

While it is well documented in the existing literature that share-financed acquirers might inflate earnings before the deal announcements, we investigate whether and how director networks between acquiring and target firms affect such earnings management behaviour. We compare abnormal accruals prior to a mergers and acquisitions (M&A) deal announcement between acquirers that had director networks in the target firms and those who did not. Under cash-financed M&A deals, we do not find a significant difference in accrual earnings management between these two types of firms. Our analysis, however, shows that share- and hybrid-financed acquirers with director networks increase accrual earnings significantly in the first and second years prior to the M&A deal, while those without director networks increase accruals earnings in the first year prior to the M&A deal. Our findings suggest that less uncertainty about the M&A deal and a stronger bargaining position in the negotiations for acquirers with director networks allow these firms to strategically time and confidently inflate their accruals earnings.