Earnings Management, Lawsuits, and Stock-for-Stock Acquirers' Market Performance

There is a positive association between stock-for-stock acquirers' pre-merger abnormal accruals and post-merger lawsuits. The probability of lawsuits is also negatively associated with both the market reaction to the merger announcement and the post-merger announcement long-term abnormal returns, indicating that the market only partially anticipates the effects of post-merger announcement lawsuits. Not only are post-merger lawsuits associated with post-merger underperformance, but they are also likely drivers of the underperformance. The study suggests that it is important that investors not only undo the direct stock price effects of earnings management but also factor the contingent legal costs associated with earnings management