Presenter Status
Associate Professor of Accounting, Accounting Economics and Finance
Second Presenter Status
Assistant Professor, Accounting
Third Presenter Status
Associate Professor, Accounting
Preferred Session
Poster Session
Location
Buller Hall Hallways
Start Date
21-10-2022 2:00 PM
End Date
21-10-2022 3:00 PM
Presentation Abstract
Using mergers and acquisitions (M&As) as a proxy to increase organizational complexity, we build upon Schnatterly et al.’s (2018) framework to addresses the gap in the management literature relating to how major firm disruptions, such as M&As, provide greater opportunities to entrenched CEOs for financial statement fraud due to higher levels of complexity. We extend the research on complexity-based information asymmetries (Ndofor et al. 2015) by empirically investigating whether accounting fraud is linked to M&As using a diverse set of variables. We propose the complex nature of M&A transactions result in higher information asymmetry, which provides a “veil” for self-interested CEOs who have an information advantage to engage in financial statement fraud. Comparing fraud firms with non-fraud firms during 1991-2016, we find evidence that fraud firms are more likely to be associated with M&As as compared to non-fraud firms using the Entrophy Balancing Method (EBM). We show similar results in Propensity Score Matching (PSM) analyses which controls for potential endogeneity to engage in M&As. Further analyses show that positive relationships between financial reporting fraud and M&As are more pronounced in more complex M&A transactions and that the positive relationship between M&As and frauds is more pronounced in M&As of a public target, stock-financed M&As, diversified M&As, larger M&As, multiple M&As, and M&As advised by investment bankers. These results also show that the positive relationship between reporting fraud and M&As is moderated post Sarbanes Oxley (SOX), for acquiring firms that engage Big N auditors and for firms with long tenured CEOs.
P-01 Financial reporting fraud: How merger and acquisition complexity provide greater opportunities for CEOs to engage in wrongdoing
Buller Hall Hallways
Using mergers and acquisitions (M&As) as a proxy to increase organizational complexity, we build upon Schnatterly et al.’s (2018) framework to addresses the gap in the management literature relating to how major firm disruptions, such as M&As, provide greater opportunities to entrenched CEOs for financial statement fraud due to higher levels of complexity. We extend the research on complexity-based information asymmetries (Ndofor et al. 2015) by empirically investigating whether accounting fraud is linked to M&As using a diverse set of variables. We propose the complex nature of M&A transactions result in higher information asymmetry, which provides a “veil” for self-interested CEOs who have an information advantage to engage in financial statement fraud. Comparing fraud firms with non-fraud firms during 1991-2016, we find evidence that fraud firms are more likely to be associated with M&As as compared to non-fraud firms using the Entrophy Balancing Method (EBM). We show similar results in Propensity Score Matching (PSM) analyses which controls for potential endogeneity to engage in M&As. Further analyses show that positive relationships between financial reporting fraud and M&As are more pronounced in more complex M&A transactions and that the positive relationship between M&As and frauds is more pronounced in M&As of a public target, stock-financed M&As, diversified M&As, larger M&As, multiple M&As, and M&As advised by investment bankers. These results also show that the positive relationship between reporting fraud and M&As is moderated post Sarbanes Oxley (SOX), for acquiring firms that engage Big N auditors and for firms with long tenured CEOs.