Earnings Management, Lawsuits, and Stock-for-Stock Acquirers' Market Performance

There is a positive association between stock-for-stock acquirers' pre-merger abnormal accruals and post-merger announcement lawsuits. The market only partially anticipates the effects of post-merger announcement lawsuits at the merger announcement and post-merger announcement long-term market underperformance is largely limited to litigated acquisitions. Overall, the evidence indicates that lawsuits are a contributing factor to post-merger announcement long-term underperformance, which is an important finding, given the puzzling nature of the underperformance and the heightened interest in explaining this phenomenon. The evidence also suggests that it is important that investors not only undo the direct stock price effects of earnings management but also factor the contingent legal costs associated with earnings management