Antitrust Merger Investigations And The Quality Of Reported Earnings

Abstract

Antitrust merger policy under Section 7 of the Clayton Act prohibits acquisitions that substantially lessen competition or tend to create a monopoly. Previous studies, however, indicate that government regulators have not been effective in identifying anticompetitive behavior. This paper examines whether accounting information used in assessing the competitive impact of mergers is subject to manipulation by investigated firms. We examine both total accruals and current accruals for manipulation and consider the implications of such earnings management for the quality of reported earnings. The results indicate that firms investigated for Section 7 violations during the 1974-1992 period do indeed manage reported earnings to influence regulatory efforts in discerning excess profits and anticompetitive behavior.