Abstract

I investigate whether firms manage earnings in proximity to initially published rumours of their impending takeover. Utilizing a unique sample of 1,831 takeover rumours, I find that rumoured target firms inflate their earnings prior to the rumour's publication. Rumours which are more likely to be anticipated by the target firm (rumours initiated by targets, rumours concerning financial distress, and rumours concerning the hiring of a financial advisor) provide stronger associations with earnings management than do other rumour types. I interpret results as consistent with rumored target firms attempting to benefit from higher takeover valuations if takeover bids are indeed forthcoming