Corrupt practices

Information leakage before full acquisitions has been widely documented. The information leakage, and the resulting pre-bid runup in the target's stock, generally increases the total cost of the acquisition. That is, information leakage and the ensuing pre-bid runup is a gain to the target and loss to the acquirer. Herein, I first ascertain the characteristics of full acquisitions that affect the amount of information leakage. I find that if the acquirer borrows to finance the acquisition then information leakage is greater. Further if the acquirer is foreign, if the target is a high-tech firm, and if the target has options on its stock all increase information leakage. I find hostile deals are effective in reducing information leakage. Lastly, information leakage increases in the percentage of managerial ownership. I next hypothesize that the identity and intent of partial acquirers is known to market participants before the announcement of a partial acquisition. I find that the market can anticipate whether a partial acquirer intends to fully-acquire or take an active role in the management of the target. Also, the market anticipates whether the acquirer is a private investment find or a non-financial corporation. Further, the acquirer's identity or intent is fully reflected in the target's stock price before the announcement of the partial acquisition. These results help explain why there are few partial acquisitions as precursors to full acquisitions.

I examine the impact of real earnings management (REM) and corporate governance on cash holdings. Extant research documents an increase in both cash holdings and REM activity in recent years and shows that agency conflicts influence both the levels and valuations of cash holdings. Motivated by agency problems of REM and Jensen's (1986) arguments concerning the free cash flow problem, I investigate whether opportunistic asset sales and reductions in discretionary expenditures are associated with levels and valuations of cash holdings. Prior research also shows that strong corporate governance mitigates opportunistic earnings management behavior and enhances the valuation of cash holdings. Using empirical models from prior research, I document that REM is positively associated with cash holdings, investors discount cash holdings of high REM firms, and, among high REM firms, valuations of cash holdings of weak corporate governance firms are discounted significantly lower relative to those of strong corporate governance firms. My study unites two lines of research by incorporating agency problems concerning REM with levels and valuations of cash holdings.

I investigate whether and how auditors address the potential risk of CEO incentive pay and CEO incentives from their equity portfolio as an incentive to commit fraud through their pricing decisions. Using an OLS regression model I find that auditors price CEO incentive pay in the post SOX period. Also, auditors price CEOs' non-linear incentives from their holdings of stock options as a fraud risk factor but do not price linear incentives from CEO holding of stock and restricted stock. Furthermore, auditors consider CEO incentives to manipulate firm performance due to the vested portion of option holdings as a fraud risk factor which is priced, and not the unvested portion of this portfolio. Furthermore, I find evidence to suggest that auditors price CEO opportunity to commit fraud, as well as CEO rationalizing the act of committing fraud, therefore concluding that auditors price all components of the fraud triangle.