The Informativeness of Internal Control Weakness Disclosure on Acquirers’ M&A Decisions

3 Pages Posted: 19 Mar 2021

See all articles by Sally Yorke

Sally Yorke

The Polytechnic University, College of Professional and Continuing Education

Phyllis Mo

City University of Hong Kong (CityU) - Department of Accountancy

Koon Hung Chan

affiliation not provided to SSRN

Date Written: February 12, 2020

Abstract

We examine the relevance of the disclosure of internal control weaknesses (ICWs) by target firms for acquirers in making their merger-and-acquisition (M&A) decisions. Based on a sample of M&A transactions in 2005–2018, we find that acquirers offer lower premiums for targets that disclose ICWs (ICW targets) before the acquisition, compared with targets that disclose no ICWs. This result is contrary to prior studies that rely on accrual quality and other proxies of targets’ information quality. We also find that acquirers offer less cash for ICW targets and that, also contrary to prior studies, ICW disclosure does not increase the probability of renegotiation on deals. The influence of ICW disclosure on premium and payment structure is more pronounced when acquirers and ICW targets are in different industries and when they do not share a common auditor. Overall, the results indicate that ICW disclosure by targets is informative to acquirers. We contribute to the literature by providing a comprehensive analysis on ICW and examining aspects of acquisitions not addressed in previous studies.

Keywords: Acquisition decisions, Disclosure of internal control weakness, Information quality, Mergers and acquisitions, Post-acquisition performance

JEL Classification: G34, D81, M41, M42

Suggested Citation

Yorke, Sally Mingle and Mo, Phyllis and Chan, Koon Hung, The Informativeness of Internal Control Weakness Disclosure on Acquirers’ M&A Decisions (February 12, 2020). Available at SSRN: https://ssrn.com/abstract=3784374 or http://dx.doi.org/10.2139/ssrn.3784374

Sally Mingle Yorke

The Polytechnic University, College of Professional and Continuing Education ( email )

9 Hoi Ting Road
Yau Ma Tei
Yau Ma Tei, Kowloon NA
Hong Kong
37460716 (Phone)
NA (Fax)

HOME PAGE: http://https://www.cpce-polyu.edu.hk/

Phyllis Mo (Contact Author)

City University of Hong Kong (CityU) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Koon Hung Chan

affiliation not provided to SSRN

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
58
Abstract Views
233
rank
513,836
PlumX Metrics