Earnings management, audit adjustments, and the financing of corporate acquisitions: Evidence from China

Clive Lennox, Zi-Tian Wang, Xi Wu

Research output: Contribution to journalArticle

13 Citations (Scopus)

Abstract

Acquirers are motivated to overstate earnings prior to stock-financed acquisitions. We hypothesize that audits help to detect and correct such overstatements. We test this using a difference-in-differences design, which compares audit adjustments to earnings for stock-financed and cash-financed acquirers before versus after the acquisitions. Consistent with our hypothesis, we find larger downward adjustments in the audits immediately before stock-financed acquisitions. Further analysis of regulatory sanctions suggests the downward adjustments are in fact warranted, rather than auditors being overly conservative. Moreover, modifications in audit reports suggest that downward adjustments do not correct all of the reporting irregularities in audited financial statements.

Original languageEnglish
Pages (from-to)21-40
Number of pages20
JournalJournal of Accounting and Economics
Volume65
Issue number1
Early online date20 Nov 2017
DOIs
Publication statusPublished - 1 Feb 2018

Keywords

  • Adjustments
  • Audit
  • Earnings management
  • Stock-financed acquisitions

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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