Target's Accounting Conservatism and the Gains from Acquisition

48 Pages Posted: 8 Apr 2020

See all articles by Anwer S. Ahmed

Anwer S. Ahmed

Texas A&M University - Mays Business School

Lucy Huajing Chen

Villanova University

Scott Duellman

Saint Louis University - Department of Accounting

Yan Sun

Saint Louis University

Date Written: March 12, 2020

Abstract

We present evidence on the benefits of accounting conservatism of the target firm in a merger and acquisition transaction. The use of conservative accounting serves as a mechanism that reduces the likelihood of acquiring underperforming assets for the acquirer, making the target more valuable due to the reduced risk. In addition, the monitoring benefit of accounting conservatism can increase the competition for the target in the acquisition market. Lastly, managers of conservative firms may be more risk averse and demand greater compensation to exit the firm. Consistent with these arguments, we find that the target’s accounting conservatism increases the deal premium received. Furthermore, we find that the target’s accounting conservatism increases the announcement returns for both the target and the acquirer. In support of acquiring firms having preference for conservative targets, we find that targets with greater accounting conservatism are more likely to receive bids. Overall, these results indicate that accounting conservatism provides benefits to both sellers and buyers of equity.

Keywords: mergers and acquisitions; target’s accounting conservatism; acquisition gains

JEL Classification: G34; M41

Suggested Citation

Ahmed, Anwer S. and Chen, Lucy Huajing and Duellman, Scott and Sun, Yan, Target's Accounting Conservatism and the Gains from Acquisition (March 12, 2020). Available at SSRN: https://ssrn.com/abstract=3544295 or http://dx.doi.org/10.2139/ssrn.3544295

Anwer S. Ahmed

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States

Lucy Huajing Chen (Contact Author)

Villanova University ( email )

United States
610-519-6321 (Phone)

Scott Duellman

Saint Louis University - Department of Accounting ( email )

3674 Lindell Blvd.
St. Louis, MO 63108
United States

Yan Sun

Saint Louis University ( email )

3674 Lindell Blvd
St. Louis, MO 63108-3397
United States

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