The Relevance of Target Accounting Quality to the Long-Term Success of Cross-Border Mergers

30 Pages Posted: 2 May 2007

See all articles by Ervin L. Black

Ervin L. Black

Steed School of Accounting

Thomas A. Carnes

Berry College - Campbell School of Business

Tomas Jandik

University of Arkansas - Sam M. Walton College of Business

Charlene Henderson

Mississippi State University - School of Accountancy

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Abstract

We investigate a sample of cross-border mergers involving US firms that acquired foreign targets between 1985 and 1995. Our general interest is in the long-term success of the acquisitions, measured by the post-merger abnormal returns to the US acquirers. Our primary focus is the relationship between the quality of the foreign target's accounting disclosures and the acquisition's long-term success. Employing a procedure recommended by Lyon et al. (1999), we find that US acquirers in cross-border mergers experience significantly negative long-term abnormal returns post-merger. These returns also are significantly more negative than those realized by a matched sample of US acquirers that acquired US targets. To investigate the potential association between the US acquirers' post-acquisition returns and target firms' accounting disclosures, we classify the merger transactions by target firm home country. We define variables to reflect the quality of accounting disclosures and control for other important country-specific features. The results reveal that post-merger abnormal returns are less negative for acquirers of targets based in countries where accounting data is less value relevant. This may be due to a higher cost of capital for target firms in these countries, resulting in a built-in discount in the pricing of targets. An examination of the premiums paid in a subset of 79 cross-border mergers reveals evidence consistent with this contention: premiums are lower for target firms based in countries where accounting data is less value relevant. These results suggest that shareholders of targets from such countries pay a price for their country's institutional framework that makes accounting information less value relevant.

Suggested Citation

Black, Ervin L. and Carnes, Thomas A. and Jandik, Tomas and Henderson, Belinda Charlene, The Relevance of Target Accounting Quality to the Long-Term Success of Cross-Border Mergers. Journal of Business Finance & Accounting, Vol. 34, No. 1-2, pp. 139-168, January/March 2007. Available at SSRN: https://ssrn.com/abstract=983217 or http://dx.doi.org/10.1111/j.1468-5957.2006.01269.x

Ervin L. Black

Steed School of Accounting ( email )

307 W Brooks
Norman, OK 73019
United States
405-325-2401 (Phone)

Thomas A. Carnes (Contact Author)

Berry College - Campbell School of Business ( email )

2277 Martha Berry Hwy NW
Mount Berry, GA 30149
United States

Tomas Jandik

University of Arkansas - Sam M. Walton College of Business ( email )

WCOB 302
Fayetteville, AR 72701
United States
479-575-6147 (Phone)

Belinda Charlene Henderson

Mississippi State University - School of Accountancy ( email )

Mississippi State, MS 39762
United States

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