Acquirer Internal Control Weaknesses in the Market for Corporate Control

51 Pages Posted: 1 Aug 2016 Last revised: 5 Oct 2017

See all articles by Masako N. Darrough

Masako N. Darrough

City University of New York - Baruch College - Stan Ross Department of Accountancy

Rong Huang

City University of New York (CUNY) - Stan Ross Department of Accountancy

Emanuel Zur

University of Maryland - Robert H. Smith School of Business

Date Written: October 4, 2017

Abstract

This paper examines how disclosures regarding internal controls, required by Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 (SOX), affect the market for corporate control. We hypothesize that acquirers with internal control weaknesses (ICWs) make suboptimal acquisition decisions based on poor quality information generated by their ineffective controls over financial reporting. We expect that such acquirers will be more likely to misestimate the value of their targets or the potential synergies from mergers, thereby overpaying for completed deals. Using a treatment sample of acquisitions made by acquirers that have disclosed ICWs and two matched control samples without ICW disclosures, we document that ICW acquirers experience a substantially more negative market response to acquisition announcements and have lower future performance than the two matched control samples without ICW disclosures. Overall, our results suggest that ineffective internal controls hinder decision-making related to mergers and acquisitions (M&A).

Keywords: M&A, Internal Control Weakness, Sarbanes-Oxley Act, Premium, Announcement Returns

JEL Classification: G14, M41, M48

Suggested Citation

Darrough, Masako N. and Huang, Rong and Zur, Emanuel, Acquirer Internal Control Weaknesses in the Market for Corporate Control (October 4, 2017). Robert H. Smith School Research Paper No. RHS 2816101. Available at SSRN: https://ssrn.com/abstract=2816101 or http://dx.doi.org/10.2139/ssrn.2816101

Masako N. Darrough

City University of New York - Baruch College - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way
New York, NY 10010
United States
646 312 3183 (Phone)
646 312 3161 (Fax)

Rong Huang

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
(646)312-3204 (Phone)

Emanuel Zur (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

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