Revisiting the evidence of earnings management prior to merger announcements: an application of Benford’s law

The most popularly-used Jones-type models are currently subjected to fierce criticism. This paper revisits the evidence suggesting share-financed acquirers engage in earnings management prior to announcing mergers to know whether the existing evidence indeed suggests the presence of earnings management or it is just the result of measurement errors in the earnings management detection models. This paper shows that the first digits of figures reported in the financial statements of share-financed acquirers prior to the merger announcements are distributed remarkably differently from what are expected under Benford’s Law. Therefore, share-financed acquirers do indeed manage earnings before announcing deals.