The Role of Accounting Quality in the M&A Market

Abstract

W e examine the role of target firms' accounting quality in the merger and acquisition process. We predict that target firm accounting quality will be positively associated with (1) the likelihood that the deal will be structured as a negotiation rather than as an auction, (2) the speed with which the deal reaches final resolution, and (3) the likelihood that the proposed deal is ultimately completed. Our empirical evidence is consistent with these predictions. These results complement and extend existing findings on target firm accounting quality and provide new evidence that financial accounting quality relates positively to the efficient allocation of the economy's capital resources.

M&A Due Diligence, Post‐Acquisition Performance, and Financial Reporting for Business Combinations

“…Therefore, the earlier phases of the due diligence review may eliminate substantially all "bad" target firms from the sample before an acquisition agreement is reached. Prior research also suggests that deal termination is a pervasive outcome of the transactional due diligence process (Skaife and Wangerin 2013;Amel-Zadeh and Zhang 2014;Marquardt and Zur 2014). If it is the case that acquirers successfully identify and terminate substantially all transactions where an MAE or breach occurs, this also weakens the ability to find evidence of meaningful effects of the due diligence process in the remaining sample of completed acquisitions.…”

“…The underlying activities conducted in the due diligence process are unobservable. Consequently, I follow recent literature using the number of days between the confidentiality agreement, acquisition agreement, and closing dates of the transaction as a proxy for due diligence (Marquardt and Zur 2014;Amel-Zadeh and Zhang 2014). I estimate the time to negotiate the acquisition agreement and to complete the transaction as a function of target firm information risk, involvement by deal advisors, and other firmand transaction-specific characteristics.…”

Governance and Equity Prices: Does Transparency Matter?*

“…Martin and Shalev (2011) and McNichols and Stubben (2011) show that this is because acquiring firms can bid more effectively and expected synergies are larger for target firms that are more transparent. Similarly, Amel-Zadeh and Zhang (2011) and Marquardt and Zur (2011) find that low transparency (due to financial restatements or poor accrual quality) creates frictions in the market for corporate control and hence inhibits a more efficient allocation of resources via takeovers.…”

“…Due to transparent firms, there is more precise information available to investors, it is less difficult for outsiders to assess synergies, which facilitates actual takeovers (e.g., Amel-Zadeh and Zhang, 2011;Marquardt and Zur, 2011;Martin and Shalev, 2011;McNichols and Stubben, 2011). This strengthens the effect of good governance.…”

“…Since the alpha for the high transparency tercile remains positive and significant for both equaland value-weighted portfolios, we conclude that a firm's information environment creates another important dimension that matters for the way in which a firm's governance mechanism affects firm performance. Put differently, it is likely that a firm's information environment has an incremental impact on its takeover likelihood (see, e.g., Amel-Zadeh and Zhang, 2011;Marquardt and Zur, 2011;Martin and Shalev, 2011;McNichols and Stubben, 2011). Therefore, transparency might be an additional variable for gaging a firm's takeover probability, which might significantly enhance the takeover factor of Cremers, Nair, and John (2009).…”