Financial Statement Comparability and the Efficiency of Acquisition Decisions

55 Pages Posted: 30 Oct 2012 Last revised: 29 Jul 2016

Ciao-Wei Chen

University of Illinois at Urbana-Champaign - Department of Accountancy

Daniel W. Collins

University of Iowa - Department of Accounting

Todd D. Kravet

University of Connecticut - Department of Accounting

Richard Mergenthaler Jr.

University of Iowa - Henry B. Tippie College of Business

Date Written: July 2016

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 make more profitable acquisition decisions when target firms’ financial statements are more comparable — as evidenced by higher merger announcement returns, higher acquisition synergies, and better future operating performance. We also find that post-acquisition goodwill impairments and post-acquisition divestitures are less likely when target firms’ financial statements are more comparable. Finally, we find that acquirers benefit most from comparability when acquirers’ ex-ante information asymmetry is higher, acquirers operate in volatile operating environments, and management knows relatively less about the target. In total, our evidence suggests targets’ financial statement comparability helps acquirers make better acquisition-investment decisions and fosters more efficient capital allocation.

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

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

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 (July 2016). Available at SSRN: https://ssrn.com/abstract=2169082 or http://dx.doi.org/10.2139/ssrn.2169082

Ciao-Wei Chen

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
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 Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
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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