Abstract

http://ssrn.com/abstract=1823727
 
 

References (43)



 
 

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Target Financial Reporting Quality and M&A Deals That Go Bust


Hollis Ashbaugh Skaife


Graduate School of Management, UC-Davis; University of Wisconsin, Madison - Department of Accounting and Information Systems

Daniel Wangerin


Michigan State University

March 16, 2012


Abstract:     
This study investigates the role of financial reporting quality in merger and acquisition (M&A) deals that are ultimately terminated, i.e., go bust. If a target is a U.S. publicly-traded company, an acquirer’s initial assessment of the potential benefits associated with the acquisition of the company is based on publicly available information. Generally, the acquirer obtains limited private information from the target prior to announcing the deal, but engages in transactional due diligence after signing the acquisition agreement to affirm that the financial reporting warranties made by the target are accurate. We construct a low quality financial reporting score based on measures prior research identifies as being associated with less-reliable, less-relevant, and less-precise financial reporting. We find that acquirers offer higher premiums for targets with low quality financial reporting. However, we also find that low quality financial reporting increases the likelihood of deal renegotiation, and contributes to the probability of deals going bust. We document that failed targets are more likely to restate their financial statements after the announcement of the deal, supporting our conjecture that low quality financial reporting contributes to deals being terminated. Our research provides new insights into the capital market consequences of financial reporting quality and identifies a new determinant of financial statement restatements.

Number of Pages in PDF File: 55

Keywords: Mergers and acquisitions, Financial reporting quality, Due diligence, Restatements

JEL Classification: G34, L14, M41, D82

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Date posted: April 26, 2011 ; Last revised: April 24, 2012

Suggested Citation

Skaife, Hollis Ashbaugh and Wangerin, Daniel, Target Financial Reporting Quality and M&A Deals That Go Bust (March 16, 2012). Available at SSRN: http://ssrn.com/abstract=1823727 or http://dx.doi.org/10.2139/ssrn.1823727

Contact Information

Hollis Ashbaugh Skaife (Contact Author)
Graduate School of Management, UC-Davis ( email )
Graduate School of Management
1 Shields Ave
Davis, CA 95616
United States
University of Wisconsin, Madison - Department of Accounting and Information Systems ( email )
School of Business
975 University Avenue
Madison, WI 53706
United States
608-263-7979 (Phone)
608-263-0477 (Fax)
Daniel D. Wangerin
Michigan State University ( email )
270 North Business Complex
East Lansing, MI 48824-1034
United States
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References:  43
Citations:  5

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