The Effect of Target-Firm Accounting Quality on Valuation in Acquisitions

39 Pages Posted: 12 Jun 2010 Last revised: 23 Sep 2012

Date Written: January 1, 2012

Abstract

We examine whether acquisitions are more profitable for acquirers when the firms they target disclose higher-quality accounting information. If accounting information reduces uncertainty in the value of the target firm by facilitating a more precise valuation, we predict that managers of the acquiring firm are able to bid more effectively and pay less to acquire a target firm that has high-quality accounting information. Using a large sample of acquisitions of public firms over the period 1990-2009, we find evidence consistent with our prediction. Specifically, when target firms have higher-quality accounting information, acquirer returns around the acquisition announcement are higher and target returns are lower — consistent with acquirers capturing a greater portion of acquisition gains by paying less for target firms. These findings, which are robust to a variety of controls and alternative measures of uncertainty and accounting quality, suggest that higher-quality accounting information leads to better bidding decisions in acquisitions.

Keywords: accounting quality; valuation; mergers and acquisitions

JEL Classification: M41, G34

Suggested Citation

McNichols, Maureen F. and Stubben, Stephen, The Effect of Target-Firm Accounting Quality on Valuation in Acquisitions (January 1, 2012). Rock Center for Corporate Governance at Stanford University Working Paper No. 81, Available at SSRN: https://ssrn.com/abstract=1623458 or http://dx.doi.org/10.2139/ssrn.1623458

Maureen F. McNichols

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-0833 (Phone)

Stephen Stubben (Contact Author)

University of Utah ( email )

1655 E. Campus Center
Salt Lake City, UT 84112
United States

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