Creative Accounting around Contemporaneous Involuntary Bank Mergers and Acquisitions, and Non-Routine Board Changes

Abstract

Thispaper examines the magnitude and direction of creative accounting following contemporaneousmergers and acquisitions consummated under duress, and abnormal corporate boardchanges taking evidence from Nigeria. But most importantly, the paper determineswhether any likely resultant abnormal accrual following corporate acquisitions canbe unconsciously normalized by ‘big bath’ accounting players following contemporaneousnon-routine board leader replacement. Evidence has shown that following acquisitions,mangers can engage in income-increasing management on one hand. On the other hand,new CEOs can give earnings a ‘big’ downward ‘bath’ blaming their predecessors forthe poor performance while pursuing personal contractual performance benefit. Hence,within extensive researches already carried out on the impacts of acquisitions andboard replacement on creative accounting, there remains unanswered question of theextent of accrual manipulation when the two events occur simultaneously. Drawingheavily from Jones and Dechow models in estimating normal accrual, normal cash flowfrom operations and both discretionary accrual and cash flow, we report consistentwith extant literatures, that under consolidation duress, the victim firms engagein a significant discretionary income-increasing manipulation. Our study also confirmsthat significant downward accrual management follows corporate board changes inNigeria. However, the board changes that follow consolidation restructuring limitthe persistence of the abnormal accrual in the end. We find that the ‘Big bath’accounting players reverse although unconsciously a significant proportion of theupward managed accrual from opportunistic perspective. The ratio of pre consolidationaccrual hiking to post-consolidation board changes reversal is 3:2, which indicates67% normalization for stock based acquisitions. For cash based acquisitions however,the reversal is much lower. Our findings suggest that where abnormal earnings ishighly suspected following involuntary acquisitions, board restructuring that willlead to new managers could help in correcting or reversing significant proportionof the accrual abnormality. Keywords: Discretionary Accounting,Consolidations, Earnings management, Mergers and acquisitions, Accrual