Earnings management around UK open offers

We examine the long run operating and stock price performance of UK open offer firms in the

context of the earnings management hypothesis.We find that in the pre-offer period offer firms report significant

improvements in their operating performance unrelated to cash flow performance. Results on return

performance show that offer firms outperform various benchmarks in the pre-offer year but underperform

up to four years after the offer. Regression results show that pre-offer discretionary current accruals predict

the long-run post-offer return underperformance but do not predict the short-run reaction to SEO announcements.

Our findings are more consistent with the earnings management hypothesis than with either the timing

hypothesis or the managerial response hypothesis and suggest that investors do not take full account of the

information available at the time of open offers.