Using Financial Accounting Information in the Governance of Takeovers: An Analysis by Type of Acquirer

Abstract:     
The substantial changes in the corporate governance mechanism of acquired firms that take place during the periods surrounding corporate acquisitions lead investors and other corporate financiers to an intensive search for financial accounting inputs for decision making. We examine whether financial accounting information on takeover targets provides useful input in the corporate governance mechanisms of US publicly traded takeovers in these periods. Our analysis is by four different types of acquirers: foreign firms, publicly traded US firms, private US acquirers, and leverage buyouts (LBOs). We expect that certain firm-specific financial accounting characteristics of takeover targets by type of potential acquirer affect valuation. To examine this expectation we construct a probability summary-value measure, composed of eight financial accounting variables, based on the type of acquirer. We also expect the probability summary-value measure to be useful for determining investment strategies in acquired firms. The empirical results strongly support our expectations.

Keywords: Corporate Acquisitions, Corporate Governance, Accounting Information, Value Relevance

JEL Classification: G34, M14, M41

Accepted Paper Series