Target's Accounting Conservatism and the Gains from Acquisition

48 Pages Posted: 8 Apr 2020 Last revised: 13 Jul 2022

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: July 12, 2022

Abstract

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

Ahmed, Anwer S. and Chen, Lucy Huajing and Duellman, Scott and Sun, Yan, Target's Accounting Conservatism and the Gains from Acquisition (July 12, 2022). 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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