We investigate whether acquiring firms attempt to increase their stock price prior to a stock for stock merger in order to reduce the cost of buying the target. In a sample of stock for stock mergers completed between 1985 and 1990, we find that acquiring firms manage earnings upward in the periods prior to the merger agreement. Our results also indicate that the degree of income increasing earnings management is positively related to the relative size of the merger.

Hybrid securities, Trust preferred stock, Financial reporting, Tax incentives