Target Firm Accounting Conservatism and Corporate Acquisitions: Transferring Wealth or Benefiting Both?

60 Pages Posted: 30 Sep 2020 Last revised: 15 Dec 2020

See all articles by Taewoo Kim

Taewoo Kim

California State University, San Bernardino

William Kross

State University of New York (SUNY) at Buffalo - Department of Accounting

Inho Suk

State University of New York (SUNY) at Buffalo - School of Management; Korea University Business School (KUBS)

Date Written: July 1, 2020

Abstract

Because conservative accounting practices induce firms to report bad news earlier and defer good news disclosure, accounting conservatism in target firm accounting can hinder acquirers from identifying a potentially profitable target while it can help acquiring firms mitigate the downside risk stemming from future asset write-downs and investment inefficiency. After controlling for other accounting attributes and governance mechanisms, our analysis reveals that a firm is more likely to receive an acquisition offer when its financial reporting is more conservative. More importantly, while an acquirer’s acquisition performance turns out to be greater when the target firm’s accounting is more conservative, the acquirer and other investors pay larger takeover premiums to a more conservative target firm. Overall, our findings suggest that unlike other target firm accounting quality proxies that transfer wealth from the target to the acquirer shareholders, target firm accounting conservatism benefits the shareholders of both the acquirer and the target.

Keywords: accounting conservatism; mergers and acquisitions; overvaluation; agency costs

JEL Classification: D80; G34; M41; M45

Suggested Citation

Kim, Taewoo and Kross, William and Suk, Inho, Target Firm Accounting Conservatism and Corporate Acquisitions: Transferring Wealth or Benefiting Both? (July 1, 2020). Available at SSRN: https://ssrn.com/abstract=3672892 or http://dx.doi.org/10.2139/ssrn.3672892

Taewoo Kim

California State University, San Bernardino ( email )

5500 University Parkway
San Bernardino, CA 92407
United States

William Kross

State University of New York (SUNY) at Buffalo - Department of Accounting ( email )

Buffalo, NY 14260
United States

Inho Suk (Contact Author)

State University of New York (SUNY) at Buffalo - School of Management ( email )

342 Jacobs Management Center
Buffalo, NY 14260-4000
United States
716-645-3215 (Phone)

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea

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