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Target’s Earnings Quality and Bidders’ Takeover Decisions

55 Pages Posted: 14 Sep 2012  

Kartik Raman

Bentley University

Lakshmanan Shivakumar

London Business School

Ane Tamayo

London School of Economics & Political Science (LSE)

Date Written: June 14, 2012

Abstract

This study examines how takeover decisions are influenced by the quality of information in target firms’ earnings. We show that bidders prefer negotiated takeovers in deals involving targets with poor earnings quality. Moreover, earnings quality and takeover premiums are negatively related in negotiated takeovers, suggesting that bidders obtain valuable private information through negotiations. We also find that bidders share information risk with target shareholders by paying with more equity for targets with poor earnings quality. These findings are driven primarily by the asymmetric information component of earnings quality (as opposed to the symmetric component), and are observed mainly in inter-industry takeovers, where asymmetric information concerns are greater, rather than in intra-industry takeovers. We conclude that targets’ earnings quality affects bidders’ takeover decisions, particularly in cases of large asymmetric information between targets and bidders.

Keywords: takeovers, earnings quality, asymmetric uncertainty, negotiation, bid premium, stock payment

JEL Classification: G34, M41

Suggested Citation

Raman, Kartik and Shivakumar, Lakshmanan and Tamayo, Ane, Target’s Earnings Quality and Bidders’ Takeover Decisions (June 14, 2012). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2145991

Kartik Raman

Bentley University ( email )

175 Forest Street
Waltham, MA 02154
United States

Lakshmanan Shivakumar (Contact Author)

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8115 (Phone)
+44 20 7000 8101 (Fax)

HOME PAGE: http://faculty.london.edu/lshivakumar/

Ane Miren Tamayo

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)20 78494689 (Phone)

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