Earnings management by acquiring firms in cash mergers

Figures & data

Table 1. Descriptive statistics.

	Mean	25th	Median	75th	Std. Dev
UE_CE	0.017	−0.024	0.013	0.060	0.114
SI	0.018	0.000	0.003	0.017	0.039
DWCA	0.007	−0.025	0.002	0.031	0.072
LEV	0.338	0.127	0.308	0.474	0.270
OP_CYC	−4.695	−5.127	−4.778	−4.341	0.667
H_NOA	0.500	0.000	0.500	1.000	0.500
MTB	3.347	1.568	2.422	3.929	4.374
MEET	0.030	0.000	0.000	0.000	0.170
EQ_INS	0.584	0.000	1.000	1.000	0.493
BIG4	0.792	1.000	1.000	1.000	0.406
FIN_COND	4.040	2.262	3.384	5.004	3.639
L_MS	0.500	0.000	0.500	1.000	0.500
DEAL_VAL	4.589	3.219	4.595	5.979	1.981
REL_SIZE	0.269	0.033	0.114	0.299	0.432
TENDER	0.052	0.000	0.000	0.000	0.223
DIVER	0.305	0.000	0.000	1.000	0.461
TOE_HOLD	0.012	0.000	0.000	0.000	0.109
PUB_TAR	0.178	0.000	0.000	0.000	0.383
PRIV_DEBT	0.671	0.000	1.000	1.000	0.470
N	2,178

Notes: This table reports descriptive statistics for a sample of 2,178 deals, spanning the years 2000–2019. The variables are defined as in Appendix A.

Table 2. Earnings management by highly leveraged cash acquirers with debt financing.

	UE_CE	DWCA
	(1)	(2)
SI	0.0304
	(0.266)
LEV	−0.0007	0.0127**
	(−0.036)	(2.357)
SI × LEV	0.8555***
	(4.316)
OP_CYC	−0.0007	−0.0008
	(−0.084)	(−0.180)
H_NOA	0.0330**	−0.0098**
	(2.681)	(−2.055)
MTB	0.0007	0.0007*
	(0.705)	(1.800)
MEET	0.0005	0.0141
	(0.024)	(0.913)
EQ_INS	−0.0156***	0.0029
	(−2.817)	(0.616)
BIG4	0.0057	−0.0031
	(0.532)	(−0.579)
FIN_COND	0.0019	0.0009**
	(1.609)	(2.032)
L_MS	0.0071	0.0039
	(0.520)	(0.972)
DEAL_VAL	0.0033*	−0.0033**
	(1.946)	(−2.600)
REL_SIZE	0.0005	−0.0028
	(0.078)	(−0.739)
TENDER	0.0168*	−0.0032
	(1.815)	(−0.610)
DIVER	−0.0096	0.0013
	(−1.611)	(0.388)
TOE_HOLD	0.0680	−0.0189
	(1.207)	(−1.675)
PUB_TAR	−0.0085	0.0066
	(−0.761)	(1.619)
PRIV_DEBT	−0.0037	0.0046
	(−0.622)	(1.174)
Constant	−0.0541	−0.0151
	(−1.156)	(−0.638)
Industry Fixed Effects	Yes	Yes
Year Fixed Effects	Yes	Yes
N	2,178	2,178
R-squared	0.1357	0.0575

Notes: This table shows regression results for testing whether highly leveraged debt-financed cash bidders use classification shifting and accruals management in the year preceding a merger announcement. All variables are described in Appendix A. The t-statistics (in parentheses) are calculated using standard errors clustered by industry. *, **, and *** represent significance levels of 0.10, 0.05, and 0.01, respectively (two tailed).

Table 3. Control groups.

Panel A: Cash acquirers with debt financing vs. non-M&A firms with debt financing
	UE_CE	UE_CE	DWCA	DWCA
	(1)	(2)	(3)	(4)
SI	0.0696	0.1096*
	(1.151)	(1.838)
LEV		0.0395***		0.0044
		(3.173)		(0.938)
SI ×LEV		−0.0826
		(−0.623)
CASH_DF1	−0.0065	0.0094	0.0033*	0.0014
	(−0.752)	(0.734)	(1.733)	(0.401)
SI × CASH_DF1	0.2400*	0.0256
	(1.766)	(0.262)
LEV × CASH_DF1		−0.0395		0.0059
		(−1.372)		(1.023)
SI × LEV × CASH_DF1		0.4810***
		(5.266)
OP_CYC	0.0089	0.0074	−0.0012	−0.0014
	(1.083)	(0.901)	(−0.295)	(−0.332)
H_NOA	0.0476***	0.0470***	−0.0205***	−0.0209***
	(3.257)	(3.136)	(−4.178)	(−4.124)
MTB	0.0004	0.0003	−0.0001	−0.0002
	(0.598)	(0.463)	(−0.279)	(−0.395)
MEET	−0.0053	−0.0074	0.0234***	0.0226***
	(−0.698)	(−1.039)	(3.459)	(3.423)
EQ_INS	−0.0234***	−0.0235***	0.0052*	0.0051*
	(−3.153)	(−3.199)	(1.822)	(1.786)
BIG4	0.0038	0.0038	−0.0002	−0.0002
	(0.297)	(0.304)	(−0.053)	(−0.035)
FIN_COND	0.0010	0.0018**	0.0010***	0.0012***
	(1.188)	(2.116)	(3.538)	(4.434)
L_MS	−0.0153	−0.0139	−0.0078**	−0.0074**
	(−0.818)	(−0.754)	(−2.524)	(−2.424)
Constant	0.0446	0.0180	−0.0326	−0.0332
	(0.823)	(0.316)	(−1.430)	(−1.458)
Industry fixed effects	Yes	Yes	Yes	Yes
Year fixed effects	Yes	Yes	Yes	Yes
N	4,356	4,356	4,356	4,356
R-squared	0.0506	0.0573	0.0314	0.0322
Panel B: Cash acquirers with debt financing vs. cash acquirers without debt financing
	UE_CE	UE_CE	DWCA	DWCA
	(1)	(2)	(3)	(4)
SI	0.1291**	0.1579**
	(2.553)	(2.640)
LEV		−0.0110		0.0340***
		(−0.438)		(4.657)
SI × LEV		−0.2853
		(−0.832)
CASH_DF2	−0.0118***	−0.0094*	0.0106***	0.0121***
	(−2.908)	(−1.716)	(3.488)	(3.927)
SI × CASH_DF2	0.1657*	−0.0883
	(1.927)	(−0.767)
LEV × CASH_DF2		−0.0036		−0.0149
		(−0.239)		(−1.603)
SI × LEV × CASH_DF2		0.8607**
		(2.313)
OP_CYC	0.0036	0.0025	−0.0001	−0.0001
	(0.378)	(0.257)	(−0.026)	(−0.014)
H_NOA	0.0375***	0.0381***	−0.0107***	−0.0131***
	(3.996)	(3.664)	(−3.144)	(−3.709)
MTB	−0.0005	−0.0003	0.0007	0.0003
	(−0.506)	(−0.322)	(1.194)	(0.482)
MEET	−0.0016	0.0001	0.0115	0.0110
	(−0.123)	(0.007)	(1.096)	(1.026)
EQ_INS	−0.0171***	−0.0164***	0.0015	0.0008
	(−3.066)	(−2.968)	(0.449)	(0.236)
BIG4	0.0066	0.0058	−0.0031	−0.0029
	(1.086)	(0.955)	(−0.780)	(−0.743)
FIN_COND	0.0002	0.0001	0.0011***	0.0015***
	(0.618)	(0.155)	(3.363)	(6.033)
L_MS	−0.0066	−0.0064	−0.0019	−0.0015
	(−0.712)	(−0.682)	(−0.547)	(−0.442)
DEAL_VAL	0.0041**	0.0042***	−0.0030***	−0.0030***
	(2.673)	(2.692)	(−3.781)	(−3.790)
REL_SIZE	−0.0057	−0.0065	0.0016	0.0005
	(−1.170)	(−1.341)	(0.478)	(0.138)
TENDER	0.0085	0.0080	0.0008	0.0011
	(0.844)	(0.807)	(0.210)	(0.287)
DIVER	−0.0072*	−0.0072*	0.0048**	0.0046**
	(−1.862)	(−1.846)	(2.333)	(2.322)
TOE_HOLD	0.0391	0.0414	−0.0146*	−0.0151**
	(0.865)	(0.933)	(−1.993)	(−2.037)
PUB_TAR	−0.0106	−0.0104	0.0030	0.0032
	(−1.379)	(−1.372)	(0.974)	(1.010)
Constant	0.0312	0.0251	−0.0095	−0.0141
	(0.625)	(0.522)	(−0.493)	(−0.723)
Industry fixed effects	Yes	Yes	Yes	Yes
Year fixed effects	Yes	Yes	Yes	Yes
N	3,645	3,645	3,645	3,645
R-squared	0.0936	0.0998	0.0477	0.0520

Notes: Panel A shows regression results for testing whether highly leveraged cash acquirers with debt financing engage in classification shifting and accruals management in the year preceding a merger announcement, using non-M&A firms with debt financing as a control group. Panel B shows regression results for testing whether highly leveraged cash acquirers with debt financing engage in classification shifting and accruals management in the year preceding a merger announcement, using cash acquirers without debt financing as a control group. All variables are described in Appendix A. The t-statistics (in parentheses) are calculated using standard errors clustered by industry. *, **, and *** represent significance levels of 0.10, 0.05, and 0.01, respectively (two tailed).

Table 4. Propensity score matching.

	First stage	Second stage
	HIGH_LEV	UE_CE	DWCA
	(1)	(2)	(3)
SI		0.1523
		(0.688)
LEV		0.0008	0.0265**
		(0.034)	(2.577)
SI × LEV		0.9777**
		(2.437)
OP_CYC	−0.2355*	0.0176*	−0.0120*
	(−1.728)	(1.725)	(−1.718)
H_NOA	0.6451***	0.0314*	−0.0081
	(3.401)	(1.963)	(−1.260)
MTB	0.2569***	0.0049*	0.0015*
	(9.019)	(1.914)	(1.695)
MEET	0.6741	0.0003	0.0253
	(1.597)	(0.007)	(1.011)
EQ_INS	0.0730	−0.0046	0.0008
	(0.554)	(−0.532)	(0.128)
BIG4	0.3104*	0.0353***	−0.0255**
	(1.747)	(2.765)	(−2.275)
FIN_COND	−0.7780***	−0.0027	0.0022
	(−17.311)	(−0.613)	(0.914)
L_MS	−0.1910	0.0193	−0.0042
	(−1.080)	(1.021)	(−0.604)
DEAL_VAL	−0.0157	0.0012	−0.0055***
	(−0.263)	(0.501)	(−3.153)
REL_SIZE	0.1689	0.0038	−0.0108*
	(0.823)	(0.452)	(−1.810)
TENDER	−0.2469	0.0045	0.0009
	(−0.767)	(0.393)	(0.061)
DIVER	0.1300	−0.0125	0.0002
	(0.950)	(−1.011)	(0.053)
TOE_HOLD	−0.0825	0.0540	−0.0461*
	(−0.153)	(1.050)	(−1.852)
PUB_TAR	−0.1403	−0.0123	0.0125
	(−0.737)	(−1.306)	(1.464)
PRIV_DEBT	0.4049***	−0.0090	0.0088*
	(2.945)	(−1.008)	(1.708)
TANG	0.9719
	(1.501)
ASSET_MATUR	−0.0095
	(−0.697)
EARN_VOL	−4.1773***
	(−4.001)
FIRM_SIZE	0.0662
	(0.963)
IND_LEV	0.1610
	(1.312)
Constant	0.9343	−0.0843	−0.0048
	(0.767)	(−1.357)	(−0.078)
Industry fixed effects	Yes	Yes	Yes
Year fixed effects	Yes	Yes	Yes
N	2,096	770	770
R-squared	0.3886	0.1667	0.1468

Notes: This table shows regression results for testing whether highly leveraged debt-financed cash bidders engage in classification shifting and accruals management in the year preceding a merger announcement, using the propensity-score matched sample. All variables are described in Appendix A. The t-statistics (in parentheses) are calculated using standard errors clustered by industry. *, **, and *** represent significance levels of 0.10, 0.05, and 0.01, respectively (two tailed).

Table 5. Accounting flexibility.

	ACC_FLEX = OP_CYC		ACC_FLEX = H_NOA
	UE_CE	DWCA	UE_CE	DWCA
	(1)	(2)	(3)	(4)
SI	−2.7327**		−0.0661
	(−2.301)		(−0.540)
LEV	−0.0464	−0.0503*	0.0246*	0.0229***
	(−0.729)	(−1.756)	(1.773)	(2.882)
SI × LEV	3.8845***		0.5901
	(3.048)		(1.430)
SI × ACC_FLEX	−0.5488**		0.4346
	(−2.218)		(1.524)
LEV × ACC_FLEX	−0.0097	−0.0140**	−0.0505*	−0.0228*
	(−0.710)	(−2.146)	(−1.981)	(−1.923)
SI × LEV × ACC_FLEX	0.6226**		0.1386
	(2.172)		(0.234)
OP_CYC	0.0072	0.0044	0.0005	−0.0006
	(0.721)	(0.970)	(0.059)	(−0.133)
H_NOA	0.0321***	−0.0097**	0.0426**	−0.0020
	(2.697)	(−2.022)	(2.219)	(−0.393)
MTB	0.0006	0.0006*	0.0009	0.0007*
	(0.687)	(1.791)	(0.908)	(1.803)
MEET	−0.0012	0.0140	−0.0034	0.0134
	(−0.060)	(0.905)	(−0.166)	(0.876)
EQ_INS	−0.0161***	0.0031	−0.0152***	0.0032
	(−2.779)	(0.655)	(−2.745)	(0.664)
BIG4	0.0059	−0.0030	0.0060	−0.0029
	(0.563)	(−0.543)	(0.578)	(−0.528)
FIN_COND	0.0016	0.0010**	0.0019	0.0009**
	(1.424)	(2.318)	(1.643)	(2.130)
L_MS	0.0084	0.0040	0.0085	0.0044
	(0.607)	(0.980)	(0.607)	(1.081)
DEAL_VAL	0.0034**	−0.0034**	0.0032*	−0.0032**
	(2.098)	(−2.645)	(1.872)	(−2.461)
REL_SIZE	−0.0008	−0.0023	0.0013	−0.0029
	(−0.139)	(−0.607)	(0.186)	(−0.749)
TENDER	0.0164*	−0.0029	0.0129*	−0.0040
	(1.921)	(−0.566)	(1.711)	(−0.764)
DIVER	−0.0092	0.0011	−0.0082	0.0013
	(−1.606)	(0.321)	(−1.323)	(0.393)
TOE_HOLD	0.0673	−0.0181	0.0616	−0.0193*
	(1.202)	(−1.602)	(1.100)	(−1.701)
PUB_TAR	−0.0077	0.0065	−0.0068	0.0067
	(−0.709)	(1.609)	(−0.658)	(1.642)
PRIV_DEBT	−0.0035	0.0044	−0.0040	0.0046
	(−0.628)	(1.117)	(−0.683)	(1.188)
Constant	−0.0159	0.0093	−0.0521	−0.0183
	(−0.326)	(0.385)	(−1.112)	(−0.752)
Industry fixed effects	Yes	Yes	Yes	Yes
Year fixed effects	Yes	Yes	Yes	Yes
N	2,178	2,178	2,178	2,178
R-squared	0.1420	0.0587	0.1433	0.0590

Notes: This table shows regression results for testing whether accounting flexibility increases the use of classification shifting and decreases the use of accruals management by highly leveraged debt-financed cash bidders in the year preceding a merger announcement. All variables are described in Appendix A. The t-statistics (in parentheses) are calculated using standard errors clustered by industry. *, **, and *** represent significance levels of 0.10, 0.05, and 0.01, respectively (two tailed).

Table 6. Debt contracting consequences of earnings management.

	INTER_RATE	FIN_COV	LOAN_SIZE
	(1)	(2)	(3)
UE_CE	−0.1475	−0.2091**	−0.1248
	(−1.432)	(−2.154)	(−1.151)
SI	0.3367	−0.1068	−1.0984*
	(1.050)	(−0.504)	(−1.899)
UE_CE × SI	1.4881	2.2400*	1.5991
	(0.797)	(1.701)	(0.376)
LEV	0.1230***	0.0024	0.0011
	(3.103)	(0.081)	(0.014)
UE_CE × LEV	0.3619**	0.4004*	0.3691
	(2.019)	(1.814)	(1.317)
SI × LEV	0.0167	−0.3071	1.6674
	(0.027)	(−0.553)	(1.328)
UE_CE × SI × LEV	−6.3902**	−4.9151*	0.4624
	(−2.435)	(−1.753)	(0.049)
DWCA	0.1527	−0.0305	−0.4798***
	(0.924)	(−0.268)	(−3.124)
DWCA × LEV	−0.0850	−0.1437	1.2180**
	(−0.205)	(−0.375)	(2.496)
INST	0.1094***	0.0259	0.1681***
	(3.775)	(1.381)	(4.398)
REVOL	−0.0980***	−0.0067	0.0404*
	(−5.787)	(−0.540)	(1.835)
MATUR	0.0484	0.0545*	−0.0168
	(1.601)	(1.848)	(−0.278)
PRICING	−0.0416***	0.2663***	0.0433**
	(−2.748)	(26.792)	(2.426)
FIRM_SIZE	−0.0864***	−0.0309***	−0.0532***
	(−11.085)	(−4.556)	(−5.420)
MTB	0.0037*	0.0008	0.0089***
	(1.698)	(0.685)	(3.354)
PROFIT	−0.6898***	−0.1497	0.0591
	(−4.364)	(−1.221)	(0.279)
TANG	−0.1141**	−0.0168	0.0073
	(−2.085)	(−0.590)	(0.112)
FIN_COND	−0.0026	0.0039*	0.0271***
	(−0.749)	(1.785)	(3.542)
BIG4	0.0214	−0.0016	−0.0736***
	(1.479)	(−0.118)	(−2.814)
DEAL_VAL	0.0126**	0.0060	−0.0121
	(2.208)	(1.114)	(−1.371)
REL_SIZE	0.0276	0.0006	0.2090***
	(1.396)	(0.030)	(4.405)
TENDER	−0.0111	−0.0175	0.0222
	(−0.386)	(−1.236)	(0.526)
DIVER	−0.0097	−0.0106	−0.0067
	(−0.856)	(−1.066)	(−0.527)
TOE_HOLD	0.1259**	0.1119*	0.0381
	(2.625)	(1.895)	(1.007)
PUB_TAR	0.0027	−0.0193*	0.0377*
	(0.129)	(−1.774)	(1.997)
Constant	2.8398***	0.5935***	0.6402***
	(37.257)	(8.667)	(4.241)
Industry fixed effects	Yes	Yes	Yes
Year fixed effects	Yes	Yes	Yes
N	1,281	1,388	1,384
R-squared	0.5756	0.5512	0.4115

Notes: This table shows regression results for testing the effect of classification shifting and accruals management by highly leveraged debt-financed cash bidders on debt contracting terms. All variables are described in Appendix A. The t-statistics (in parentheses) are calculated using standard errors clustered by industry. *, **, and *** represent significance levels of 0.10, 0.05, and 0.01, respectively (two tailed).

Table 7. Shiftable vs. non-shiftable special items.

	UE_CE	UE_CE
	(1)	(2)
TOTAL_SI	0.1017
	(0.816)
LEV	0.0028	0.0036
	(0.148)	(0.199)
TOTAL_SI × LEV	0.7584***
	(3.388)
SHIFT_SI		−0.1189
		(−0.660)
SHIFT_SI × LEV		0.7970**
		(2.211)
NON_SHIFT_SI		0.2493
		(0.797)
NON_SHIFT_SI × LEV		0.8455
		(1.089)
OP_CYC	0.0002	−0.0017
	(0.028)	(−0.186)
H_NOA	0.0328**	0.0326***
	(2.667)	(2.737)
MTB	0.0007	0.0007
	(0.685)	(0.681)
MEET	−0.0000	0.0005
	(−0.000)	(0.024)
EQ_INS	−0.0158***	−0.0155**
	(−2.834)	(−2.666)
BIG4	0.0059	0.0063
	(0.556)	(0.600)
FIN_COND	0.0019	0.0019*
	(1.660)	(1.699)
L_MS	0.0073	0.0071
	(0.531)	(0.509)
DEAL_VAL	0.0033*	0.0033*
	(1.962)	(1.916)
REL_SIZE	0.0003	0.0015
	(0.054)	(0.225)
TENDER	0.0167*	0.0172*
	(1.798)	(1.850)
DIVER	−0.0095	−0.0095
	(−1.607)	(−1.611)
TOE_HOLD	0.0670	0.0691
	(1.191)	(1.224)
PUB_TAR	−0.0083	−0.0087
	(−0.750)	(−0.791)
PRIV_DEBT	−0.0037	−0.0040
	(−0.636)	(−0.658)
Constant	−0.0496	−0.0610
	(−1.080)	(−1.267)
Industry Fixed Effects	Yes	Yes
Year Fixed Effects	Yes	Yes
N	2,178	2,178
R-squared	0.1382	0.1297

Notes: Column (1) indicates our main results of classification shifting by highly leveraged debt-financed cash bidders, using total special items. Column (2) indicates our main results of classification shifting by highly leveraged debt-financed cash bidders, using shiftable vs. non-shiftable special items. All variables are described in Appendix A. The t-statistics (in parentheses) are calculated using standard errors clustered by industry. *, **, and *** represent significance levels of 0.10, 0.05, and 0.01, respectively (two tailed).

Table 8. Additional controls and alternative measures for classification shifting and accruals management.

	UE_CE	DWCA	ALTER_UE_CE	ALTER_DWCA	UE_ΔCE
	(1)	(2)	(3)	(4)	(5)
SI	0.2624		−0.6605***		0.2895**
	(1.601)		(−5.063)		(2.078)
LEV	−0.0061	0.0190**	−0.0377	0.0143*	0.0032
	(−0.318)	(2.315)	(−1.035)	(1.882)	(0.150)
SI × LEV	0.9342***		1.3824***		−0.4200*
	(2.827)		(4.466)		(−1.947)
BSIZE	0.0006	0.0062
	(0.044)	(0.603)
BINDEP	−0.0055	−0.0115
	(−0.146)	(−0.544)
BOUT	−0.0018	0.0012
	(−0.820)	(0.947)
BTEN	0.0032***	−0.0006
	(4.166)	(−0.879)
OP_CYC	0.0160**	−0.0059	0.0012	0.0033	−0.0012
	(2.604)	(−1.250)	(0.137)	(0.841)	(−0.227)
H_NOA	0.0223*	−0.0140***	0.0272*	−0.0096**	−0.0041
	(1.915)	(−3.272)	(1.821)	(−2.093)	(−0.754)
MTB	0.0000	0.0001	0.0011	0.0005	−0.0006
	(0.017)	(0.255)	(1.028)	(1.483)	(−0.771)
MEET	0.0154	0.0016	0.0221	0.0058	0.0286
	(0.516)	(0.098)	(0.858)	(0.408)	(1.277)
EQ_INS	−0.0107	−0.0003	−0.0097	0.0030	0.0061**
	(−1.509)	(−0.085)	(−1.284)	(0.551)	(2.119)
BIG4	0.0139	0.0001	0.0138	−0.0051	0.0101**
	(1.466)	(0.021)	(1.217)	(−0.843)	(2.265)
FIN_COND	0.0010	0.0012**	0.0011	0.0013**	−0.0022
	(1.551)	(2.103)	(0.862)	(2.088)	(−1.645)
L_MS	0.0077	0.0034	0.0025	0.0023	−0.0077
	(0.397)	(0.786)	(0.228)	(0.452)	(−0.707)
DEAL_VAL	0.0062***	−0.0031**	0.0011	−0.0033***	−0.0019
	(3.043)	(−2.097)	(0.528)	(−2.732)	(−0.674)
REL_SIZE	−0.0210**	−0.0005	−0.0043	−0.0058	0.0151
	(−2.047)	(−0.112)	(−0.453)	(−1.320)	(1.532)
TENDER	0.0057	−0.0097	0.0111	−0.0034	0.0119
	(0.674)	(−1.356)	(1.046)	(−0.749)	(1.182)
DIVER	−0.0163**	0.0014	−0.0033	0.0008	0.0042
	(−2.154)	(0.362)	(−0.566)	(0.224)	(1.237)
TOE_HOLD	0.0650	−0.0277	0.0468	−0.0166	−0.0353
	(1.396)	(−1.674)	(0.985)	(−1.305)	(−1.656)
PUB_TAR	−0.0080	0.0055	−0.0116	0.0070*	−0.0022
	(−0.990)	(1.120)	(−1.106)	(1.740)	(−0.523)
PRIV_DEBT	−0.0032	0.0046	0.0021	0.0056	0.0015
	(−0.405)	(1.098)	(0.353)	(1.152)	(0.193)
Constant	−0.1887***	0.0022	−0.0128	−0.0001	0.0523
	(−2.884)	(0.054)	(−0.282)	(−0.006)	(1.290)
Industry fixed effects	Yes	Yes	Yes	Yes	Yes
Year fixed effects	Yes	Yes	Yes	Yes	Yes
N	1,319	1,319	2,074	2,178	2,123
R-squared	0.1957	0.0606	0.0759	0.0489	0.0627

Notes: Columns (1) and (2) show our main results of classification shifting and accruals management by highly leveraged debt-financed cash bidders after controlling for corporate governance. Columns (3) and (4) present our main results of classification shifting and accruals management by highly leveraged debt-financed cash acquirers, using alternative measures of unexpected core earnings and discretionary working capital accruals, respectively. Column (5) shows regression results for the alternative explanation of classification shifting practices by highly leveraged debt-financed cash acquirers. All variables are described in Appendix A. The t-statistics (in parentheses) are calculated using standard errors clustered by industry. *, **, and *** represent significance levels of 0.10, 0.05, and 0.01, respectively (two tailed).

Table

Main variables
UE_CE	Unexpected core earnings, defined as the residuals from McVay’s (2006) expected core earnings model. The model is estimated cross-sectionally for each industry (2-digit SICs) with at least 15 observations in a given year.
SI	Income-decreasing special items, defined as special items multiplied by negative one and scaled by sales when special items are income-decreasing, and 0 otherwise.
DWCA	Discretionary working capital accruals, defined as the residuals from the modified Jones (1991) model that includes lagged return on assets as a control for extreme operating performance. The model is estimated cross-sectionally for each industry (2-digit SICs) with at least 15 observations in a given year.
LEV	Financial leverage, defined as total debt (short- plus long-term debt) divided by total debt plus total equity.
Control variables
OP_CYC	Operating cycle, measured as the log of the day’s receivable plus the day’s inventory at the beginning of the year. OP_CYC is multiplied by negative one so that its higher values indicate lower accounting flexibility.
H_NOA	An indicator variable that is equal to 1 if the firm has lagged net operating assets above the sample median, and 0 otherwise.
MTB	The market-to-book ratio, defined as the market value of equity divided by the book value of equity.
MEET	An indicator variable that is equal to 1 for firms that just meet or beat earnings benchmarks, and 0 otherwise.
EQ_INS	An indicator variable that is equal to 1 for firms that issue new equity, and 0 otherwise.
BIG4	An indicator variable that is equal to 1 if the firm hires a Big4 auditing firm, and 0 otherwise.
FIN_COND	Altman’s (1968) Z-score, calculated as 3.3(net income/total assets) + (sales/total assets) + 1.4 (retained earnings/total assets) + 1.2(working capital/total assets) + 0.6(market value of equity/total liabilities).
L_MS	An indicator variable that is equal to 1 if the percentage of firm’s sales to total sales of its industry (3-digit SICs) is below the sample median, and 0 otherwise.
DEAL_VAL	The log of the transaction value.
REL_SIZE	The ratio of the deal value to the acquirer’s market value of equity.
TENDER	An indicator variable that is equal to 1 if the deal is a tender offer, and 0 otherwise.
DIVER	An indicator variable that is equal to 1 if the bidder and target firm are not in the same industry, and 0 otherwise.
TOE_HOLD	An indicator variable that is equal to 1 for transactions where the bidder had ownership in the target firm prior to the merger, and 0 otherwise.
PUB_TAR	An indicator variable that is equal to 1 if the target firm is a public company, and 0 otherwise.
PRIV_DEBT	An indicator variable that is equal to 1 if the bidder uses private debt to finance the bid, and 0 otherwise.
Additional variables used in supplementary and robustness analyses
CASH_DF1	An indicator variable that is equal to 1 for debt-financed cash acquirers, and 0 for the matched sample of debt-financed non-M&A firms.
CASH_DF2	An indicator variable that is equal to 1 for cash acquirers with debt financing, and 0 for cash acquirers without debt financing.
HIGH_LEV	An indicator variable that is equal to 1 if the firm has leverage higher than the sample median, and 0 otherwise.
TANG	Asset tangibility, defined as net PPE/total assets.
ASSET_MATUR	Asset maturity, defined as (gross PPE/total assets) × (gross PPE/depreciation expense) + (current assets/total assets) × (current assets/cost of goods sold).
EAR_VOL	The standard deviation of EBITDA to total assets over past three years.
FIRM_SIZE	The log of total assets.
IND_LEV	The average industry (2-digit SICs) leverage.
INTER_RATE	The log of the all-in-drawn interest spread on the bank loan over LIBOR.
FIN_COV	The log of the number of financial covenants included in a loan.
LOAN_SIZE	The amount borrowed scaled by total assets.
INST	An indicator variable that is equal to 1 if the loan’s type is term loan B or C, and 0 otherwise.
REVOL	An indicator variable that is equal to 1 if the loan is a revolver, and 0 otherwise.
MATUR	The number of months between the loan’s issue date and the loan maturity date.
PRICING	An indicator variable that is equal to 1 if the loan contract includes a performance pricing provision, and 0 otherwise.
PROFIT	The ratio of EBITDA to total assets.
TOTAL_SI	Total special items multiplied by negative one and scaled by sales.
NON_SHIFT_SI	Non-shiftable income-decreasing special items, defined as (goodwill write-offs + gains/losses on asset sales) × (−1) / sales when special items are income-decreasing, and 0 otherwise.
SHIFT_SI	Shiftable income-decreasing special items, defined as (special items − NON_SHIFT_SI) × (−1) / sales when special items are income-decreasing, and 0 otherwise.
BSIZE	The log of the total number of directors on the board.
BINDEP	The proportion of independent directors on the board.
BOUT	The average number of outside directorships held by independent directors.
BTEN	The average tenure of independent directors on the board.
ALTER_UE_CE	An alternative measure of unexpected core earnings, derived by replacing current year total accruals with lagged and current year stock returns in McVay’s (2006) expected cored earnings model. The model is estimated cross-sectionally for each industry (2-digit SICs) with at least 15 observations in a given year.
ALTER_DWCA	An alternative measure of discretionary working capital accruals, derived by including current growth in sales in modified Jones (1991) model that includes lagged return on assets as a control for extreme operating performance. The model is estimated cross-sectionally for each industry (2-digit SICs) with at least 15 observations in a given year.
UE_ΔCE	Unexpected change in core earnings, defined as the residuals from McVay’s (2006) change in expected core earnings model. The model is estimated cross-sectionally for each industry (2-digit SICs) with at least 15 observations in a given year.

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