ADDRESSING ABNORMAL CORPORATE EARNINGS FROM THE CONTEXT OF ACQUISITIONS AND BOARD TURNOVER

The purpose of this paper is to examine whether the inverse relationship between upward accrual management following acquisitions, and contemporaneous board turnover that leads to a downward accrual manipulation can interact to correct abnormal accrual strategies of managers and then normalize earnings to avoid accrual mispricing. Evidence has shown that managers have used abnormal accrual tactics to mislead investors. There has been substantial global concern on how to fix the phenomenon using alternative effective strategies.This paper used an ex post facto design to analyze sample of 3600 firm-years. The authors draw heavily from Jones model in estimating normal accrual, which was compared with actual total accrual to determine both upward and downward discretionary accrual behavior of potential outgoing managers and the new board leaders. The level of correction was based on the magnitude of discretionary accrual offsetting. The researchers found that following acquisitions, the potential outgoing managers engage in accrual-increasing strategies consistent with extant literatures. However, where the acquisitions are contemporaneous with board changes, the ‘Big bath' accounting players reverse a significant proportion of the abnormal accrual. The incoming managers can reverse up to 80% of upward managed accrual. Compared to previous reports, correction through systematic restructuring is twice much more effective. To the best of our knowledge, this is the first study that examines abnormal accrual correction through acquisitions and contemporaneous board turnover interaction. Previous researchers concentrated on the power of earnings report