Essay Example on Effect of M&A Activities on Earnings Management in Europe

In the work at hand, there is the establishment of the effects of mergers and acquisition and their effects on earnings management in European firms. The task is to be undertaken by analyzing how various firms that have been formed as mergers manage their earnings. It can be observed that various financial information of merger companies, as indicated in the full dataset, shows different values. Either such values can be increments or deductions from the original true values as obtained from the financial transactions of the concerned firms. Therefore, there is need to present the SPSS analysis of the said financial data to establish the extent to which they have been manipulated from the original values, alongside determining how they impact on the face values of the firms as seen by its stakeholders, competitors, customers and potential clients, as well as the employees.

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From the statistical analysis of financial information of companies resulting from mergers, there shall either be the ratification or refuting of the claim where merger firms manage their earnings with certain aims in mind. They include the need to need for the figures obtained after a given financial period to merge a pre-determined figure. It is in such a scenario that a false performance status of a firm is indicated, making its stakeholders and potential investors have a notion that indeed, the firms are registering satisfactory performances. Further, earnings management of the mergers is undertaken to instil a belief in the target stakeholders that mergers are performing as expected, given that their sole aim is to consolidate their capital, raise their operational capacities, and reduce market competition. They can then control a considerable scale of markets, making their business activities to perform optimally. Failure to achieve optimal performance can attract criticism from such stakeholders as investors, hence the need to perform earnings management.

Thus, in the task at hand, there is the use of managed earnings data from merger firms in Europe. They shall be analyzed using SPSS where descriptive statistical representations shall result, used for analytical discussion. The methodology employed therein is a modified Jones model used in researching accrual-based earnings management per industry.

SPSS Data Output

To investigate the effects of mergers and acquisition on earnings management in Europe, practically, there was the collection of financial reports of companies formed through M&A. the dataset was extracted from FactSet. The dataset underwent earnings management in four periods, and their trends were studied using SPSS statistical analysis. The company information analyzed are Operating Cash Flows (OCF), total assets, sales, Cost of Goods Sold (COGS), inventory turnover, Selling, General, and Administrative Expenses (SG&A), advertising expenses, Research and Development expenses (R&D), other current liabilities, short-term receivables, net profit, market capitalization, total equity, and total liabilities. In the analysis, their patterns as they changed, showed by percentage changes, were noted to finally aid in determining the effects of mergers and acquisition. Finally, a regression made per country per real earnings management model was developed

From the data presented in the files form SPSS analysis, there are the reports on the financial analyses of all the above-listed areas of performance of firms formed via mergers and acquisition.

The output from the operating cash flow data is generally increasing for the four periods, a likely product of earnings management to raise it to bring a picture of healthy financial performances of mergers. The total asset output is generally constant, while those of sales are generally decreasing, a likely product of earnings management for tax evasion purposes. Furthermore, the output form cost of goods sold data is generally reducing, a likely result of earnings management aimed at veiling the real cost of purchases and finally the performance of the merger firms.

There is also the generally reducing inventory turnover ratio, a product of earnings management aimed at veiling the real movement and performance of stock dealt in by the mergers. Besides, the selling, general, and administrative expenses are also generally rising, a likely indication of the aim of mergers to paint the picture of tough economic times, for tax evasion purposes. The advertising expenses, too, have a generally rising trend, a result of mergers and acquisition. There is also the output of research and development expenses for all companies, generally rising, a result of earnings management.

Furthermore, there are reports on other current liabilities, which a generally rising pattern. The short-term receivables by the mergers also have a generally rising pattern, which similarly applies to net profits registered. Market capitalization; moreover, are also generally rising for the merger companies, a likely indication of earnings management aimed at bringing the image that their shares are widely bought in the stock exchange markets. However, the total equity is generally decreasing for the firms, which also applies to the total liabilities.

Finally, as can be observed in the above explanations of the SPSS reports on the financial performances from earnings of merger firms in Europe, it is evident that there has been the distortion of real financial performances with the view to hiding the real returns from operations. They also hide the quantities of assets owned, inventory performances, market capitalizations, the expenses incurred, the profits realized and the liabilities owed to them. In the end, they will achieve such things as tax evasion and investor attraction.

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