Purpose: This paper attempts to investigate the effect of corruption on the real and accrual earnings management of target firms in the process of mergers and acquisitions.Design/methodology/approach: The sample includes target firms from the European area that participate in mergers or acquisitions announced during 2010–2020. The preliminary empirical part estimates the level of earnings management during the period two years before the deal's announcement to identify whether the sample follows the manipulation behavior that the literature suggests for target firms. The primary empirical analysis focuses on the impact of corruption on real and accrual-based earnings management proxies, employing regression models and two alternative proxies for corruption. The existing literature points out that the combination of low levels of corruption and an integrated legal system reduces earnings manipulation.Findings: The findings provide strong evidence for systematic downwards accounting manipulation practices, whereas the findings for real earnings management are not significant. The findings of the main empirical part show that corruption is positively associated with accrual-based manipulation and negatively related to real earnings management. In essence, in economies with a high level of transparency, managers adopt the manipulation of operating activities as a less detectable practice of earnings management instead of engaging in accounting procedures.Originality/value: This study contributes to the literature highlighting the diversification of these firms' manipulation strategies according to the national level's corruption status.

This study investigates how target firms’ accrual-based earnings management affects the likelihood of cross-border mergers and acquisitions completion failure, emphasizing the roles of corruption, legal efficiency, and geographic distance. Using a sample of 496 European target firms involved in cross-border mergers and acquisitions, the analysis reveals a positive association between earnings management and deal withdrawal. While corruption and legal-system efficiency differences alone show no direct impact, their interaction with earnings management increases the likelihood of deal failure, particularly when target firms operate in more corrupt and less legally efficient countries than their acquirers. Geographic distance demonstrates weak evidence of a negative effect on deal completion when combined with increased earnings management levels. These findings underscore the critical role of earnings management in cross-border mergers and acquisitions outcomes, especially under high information asymmetry stemming from institutional differences.

Purpose: This study investigates the effect of accrual-based and real earnings management practices on the likelihood of M&A deal withdrawal, highlighting the role of financial reporting quality in the acquirer’s decision-making. Design/methodology/approach: Using a dataset of 1,611 listed nonfinancial EU target firms involved in completed or withdrawn M&A, we implement a logistic regression model to investigate the relationship between earnings manipulation and deal outcomes. Findings: Our findings indicate that target firms engaging in aggressive manipulation practices through accruals, production cost and sales in the period preceding the deal announcement are significantly associated with increased deal withdrawal risk. This demonstrates acquirers’ ability to detect earnings management and incorporate this information into their decision-making process. Furthermore, the influence of earnings management on withdrawal probability remains consistent in conditions of high information asymmetry deriving from the national and industry differences, suggesting that acquirers can effectively evaluate target firms’ financial quality despite limited information. An additional analysis revealed that when target firms operate in common-law countries and regulated sectors, the impact of earnings management on deal withdrawal becomes insignificant. This finding is likely related to the limited opportunities for misleading practices in such business environments. Research limitations/implications: This research focuses on publicly listed target firms, and its findings may not fully reflect the dynamics present in private firms. Furthermore, while it analyzes information asymmetry at the national level, it does not specifically address how these effects might be more pronounced in M&As between developed and emerging countries, particularly using quantifiable measures of information asymmetry. Practical implications: This study emphasizes the need for acquirers to implement thorough due diligence procedures, considering both accrual and real earnings management, especially under conditions of high information asymmetry. It highlights the central role of financial reporting quality in the success of critical corporate events, such as M&As. Originality/value: In contrast to previous research that primarily focused on accrual-based models, this study innovates using both accrual and real earnings management, offering a comprehensive perspective on target firms’ manipulation tactics. This aspect, combined with the selected sample, establishes an innovative approach to the topic of M&As, contributing to enhancing the current literature and providing new research avenues.