Decoding Due Diligence Delays: The Role of Earnings Management in European Mergers and Acquisitions Outcomes

This study investigates the relationship between the earnings management practices of target firms prior to mergers and acquisitions (M&A) announcements and the duration of post-announcement due diligence. Utilizing a dataset of 1070 publicly listed European target firms that participated in M&A transactions from 2005 to 2023, we provide robust evidence that earnings management, specifically through accruals and production cost manipulation, is significantly associated with extended due diligence periods. Our analysis reveals that income-increasing accrual-based earnings management and income-decreasing manipulation of production costs contribute to a notable prolongation of due diligence. Furthermore, this research examines the moderating role of information asymmetry, focusing on cross-border and inter-sector transactions. The findings indicate that the positive association between earnings management and due diligence duration remains significant, even in heightened information asymmetry. These results suggest that acquirers possess the required means and mechanisms to accurately assess the financial status of target firms, even when such firms engage in alleged, less detectable real earnings management practices or when the transactions occur within unfamiliar national and industry contexts.