Target Firm Accounting Conservatism and Corporate Acquisitions: Transferring Wealth or Benefiting Both?
60 Pages Posted: 30 Sep 2020 Last revised: 15 Dec 2020
Date Written: July 1, 2020
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: Suggested Citation