Financial Statement Comparability and the Efficiency of Acquisition Decisions

Abstract:     
This study examines whether acquirers make better acquisition decisions when target firms’ financial statements exhibit greater comparability with industry peer firms. We predict and find that acquirers’ three-day returns and acquisition synergies are greater when targets’ financial statements exhibit greater comparability. Acquirers’ post-acquisition operating performance is also better when targets’ financial statements are more comparable. We also find that the relation between targets’ comparability and the efficiency of acquisition decisions is more pronounced for diversifying acquisitions, suggesting that comparable information is more important when acquirers have relatively limited knowledge about the targets. Finally, we find that the effect of target firms’ comparability remains economically and statistically significant after controlling for other earnings attributes such as target firms’ accrual quality and acquirers’ conditional conservatism. This evidence suggests that targets’ financial statement comparability helps acquirers make better acquisition decisions and thus fosters efficient capital allocation.

Number of Pages in PDF File: 57

Keywords: Comparability, Earnings Attributes, Mergers, Acquisitions, Capital Allocation

JEL Classification: M40, M41, M49, G34, G31

working papers series