Earnings management and the performance of acquiring companies in mergers and acquisitions in Brazil

Abstract

This article investigated whether the post-merger and acquisition (M&A) economic and market performance of Brazilian companies was influenced by earnings management (EM) practices adopted prior to these transactions. Although empirical evidence from Brazil indicates that synergy generation from M&As is negative, the causes of this decline may be related to factors such as accounting-based EM practices undertaken before the transactions. Accordingly, this study addresses this gap by examining the relationship between EM practices and synergy generation in M&A transactions in Brazil. The relevance of this research lies in demonstrating that opportunistic managerial behavior, such as the use of EM practices in the periods preceding M&As, may also affect the synergies expected from these transactions in Brazil. EM practices adopted in prior periods are detrimental to synergy generation, support the agency hypothesis in the context of Brazilian M&As, and may affect stakeholders’ expectations, particularly those of shareholders. The sample comprised 233 M&A transactions completed by 89 companies listed on B3 S.A. – Brasil, Bolsa, Balcão between 2010 and 2021. Accounting data were obtained from the Refinitiv® database for the 2008–2023 period, and regression models were estimated using ordinary least squares. The results indicated that accrual-based and real earnings management practices adopted before M&As reduced synergy gains, as measured by economic performance indicators. By contrast, neither type of EM practice had a statistically significant effect on market performance. The findings suggest that expected synergy gains may have been compromised by managers’ interests, as predicted by agency theory, with implications for corporate governance and investors’ decision-making.