Abstract

http://ssrn.com/abstract=2169082
 
 

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Financial Statement Comparability and the Efficiency of Acquisition Decisions


Ciao-Wei Chen


University of Iowa - Department of Accounting

Daniel W. Collins


University of Iowa - Department of Accounting

Todd D. Kravet


University of Texas at Dallas - Naveen Jindal School of Management

Richard Mergenthaler Jr.


University of Iowa - Henry B. Tippie College of Business

April 1, 2013


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

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Date posted: October 30, 2012 ; Last revised: May 4, 2013

Suggested Citation

Chen, Ciao-Wei and Collins, Daniel W. and Kravet, Todd D. and Mergenthaler, Richard, Financial Statement Comparability and the Efficiency of Acquisition Decisions (April 1, 2013). Available at SSRN: http://ssrn.com/abstract=2169082 or http://dx.doi.org/10.2139/ssrn.2169082

Contact Information

Ciao-Wei Chen
University of Iowa - Department of Accounting ( email )
108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
Daniel W. Collins
University of Iowa - Department of Accounting ( email )
108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0912 (Phone)
319-335-1956 (Fax)
Todd D. Kravet
University of Texas at Dallas - Naveen Jindal School of Management ( email )
800 West Campbell Road
Richardson, TX 75080-3021
United States
Richard Dean Mergenthaler Jr. (Contact Author)
University of Iowa - Henry B. Tippie College of Business ( email )
108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0848 (Phone)
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