Earnings management by acquiring firms in stock for stock mergers

We investigate whether acquiring firms attempt to increase their stock pric e prior to a stock for stock merger in order to reduce the cost of buying t he target. In a sample of stock for stock mergers completed between 1985 an d 1990, we find that acquiring firms manage earnings upward in the periods prior to the merger agreement. Our results also indicate that the degree of income increasing earnings management is positively related to the relativ e size of the merger. (C) 1999 Elsevier Science B.V. All rights reserved. J EL classification: M41; G34.