Target's Accounting Conservatism and the Gains from Acquisition
48 Pages Posted: 8 Apr 2020 Last revised: 13 Jul 2022
Date Written: July 12, 2022
We present evidence on the benefits of target firms’ accounting conservatism in a merger and acquisition transaction. The unique features of conservatism imply that its use by the target reduces acquirer’s risks of acquiring underperforming assets and overpaying for well-performing assets. In addition, conservatism results in greater production of verifiable information that can help the acquirer better estimate and realize synergies of the combined firm. Consistent with these arguments, we find that firms with greater accounting conservatism are more likely to receive a bid. We also find that target’s accounting conservatism increases the deal premium and the announcement returns for both the target and the acquirer. Overall, these results indicate that conservatism provides benefits to both sellers and buyers of equity in an acquisition transaction.
Keywords: mergers and acquisitions; accounting conservatism; acquisition gains
JEL Classification: G34; M41
Suggested Citation: Suggested Citation