Strategic decision making of top management: earnings management and corporate acquisitions

Official URL: http://dx.doi.org/10.1109/TEM.2020.2965170

Although acquisition strategies have been widely used by firms, past research has suggested that this type of strategic tactic can be risky, hence top management must justify this decision. Top management can engage in hubristic behaviors to do so. Therefore, we investigate if it is possible to identify the hubristic managerial before the decision is implemented, and how hubristic behaviors by the managers impact the long-term market performance of the firm. Using a sample of 11 596 firms over a span of 27 years, we found that managers actively manipulate firm performance prior to an acquisition, the degree of manipulation affects the degree of long-term performance, and the top management's decision to purchase the asset will negatively affect firm organizational performance. We contribute to organizational strategic decision-making literature by showing that managers may act with hubris in acquisitions decisions and that this hubris is predictable. Our results also suggest that top managers in pursuit of a corporate acquisition will need to justify their decision making to the board of directors by illustrating their success in managing the firm through high firm performance.