Investigating the relationship between bank performance and accounting standards: evidence from M&As in European banking

Abstract

PurposeThe study aims to identify whether international financial reporting standards (IFRS) or local generally accepted accounting principles (GAAP) reporting provides investors and senior management of acquirer banks with superior information on target banks under post-merger bank performance.Design/methodology/approachThe authors examine the claim that IFRS improves corporate transparency and increases financial reporting quality in European Bank merger and acquisitions (M&As). The authors compare the financial performance of merged banks where the target and acquirer banks employed the same reporting system (up to 305 merged banks) to the performance of a control group of banks not engaged in M&A activity (up to 1,690 European banks).FindingsLocal GAAP reporting allows a more transparent assessment of financial performance using traditional indicators, making it a superior tool for assessing potential acquisition targets.Practical implicationsOverall, the empirical findings are consistent with prior studies and indicate a significant relationship between local GAAP and post-merger performance, while IFRS does not contribute to post-merger bank performance.Originality/valueThe study is one of the very few studies to investigate the relationship between bank performance, M&A activity and accounting standards in EU-28 countries. The primary contribution the finding of poor performance of IFRS reporting merged banks compared to local GAAP banks in EU-28 countries in line with prior results of Huian (2012). In addition, several deal- and bank-specific characteristics that affect accounting standards influence M&A transactions in European banks.

The relationship between the accounting standards and the global financial crisis: empirical analysis of mergers and acquisitions in banking industry

“…It simply says that my paper is different from existing literature (i.e. Abu Alrub et al , 2020; Akgün, 2022) because it examines the financial statements of targets and bidding banks from 33 countries that were reported under IFRS and local GAAP during the financial crisis. The objectives of this study are to first perform an analysis of the impact of the financial crisis with the adoption of IFRS and to what extent these crises influence banks’ performance in the global economy context, while Akgün (2022) focuses only on the European countries context.…”

“…Hence, Mitton (2002) suggests that firms have significant relationships with higher disclosure quality, a better ownership, obtaining greater transparency and stronger board structure during the global financial crisis. According to Akgün (2022), IFRS provides better accounting information, comparability of financial statements, comprehensive with disclosure requirements and thus decreases information asymmetry. Therefore, IFRS improves higher-quality information than local GAAP.…”

“…Akgün (2022) examined the financial performance of merged banks in European countries where the target and acquirer banks used the IFRS or local GAAP to examine the financial performance of European banks not engaged in M&A activity. The empirical evidence results show that local GAAP reporting provides more useful information to executive bank managers and investors in this setting than IFRS.…”

“…The empirical evidence results show that local GAAP reporting provides more useful information to executive bank managers and investors in this setting than IFRS. Different from Akgün (2022), who examined the impact of IFRS or local GAAP on financial reporting on M&A for banks during the global financial crisis by using and extending the dataset. In contrast to the literature focusing on non-financial firms and the literature on the relationship between accounting standards and financial crises, the evidence from banking M&As is very limited.…”

Financial sector and outbreak of the economic crisis in 2008: IFRS versus US GAAP

“…Additionally, there are studies that exhibit that under IFRS banks produce more accurate figures for profitability (Ballas et al. , 2019), while other researchers suggest that local GAAP allows a more refined assessment of financial performance for banking sector, suggesting that local GAAP is a better tool for investors willing to acquire banking institutes (Akgün, 2022).…”