Financial Statement Comparability and the Efficiency of Acquisition Decisions

• In Event: Reporting Quality and Corporate Finance

Abstract

This study examines whether acquirers make better acquisition decisions when target firms’ financial statements exhibit greater comparability with industry peer firms. We predict and find that acquirers’ three-day returns and acquisition synergies are greater when targets’ financial statements are more comparable. We also find that post-acquisition operating performance is better when targets’ financial statements are more comparable. Further, we find the effect of comparability on acquisition decisions is more pronounced for diversifying acquisitions, suggesting that comparable information is more important when acquirers have relatively limited knowledge about the target. Supplemental tests reveal that the deal premium paid by acquirers is smaller, and post-acquisition goodwill impairments and post-acquisition divestitures are less likely when targets exhibit greater accounting comparability. In total, our evidence suggests targets’ financial statement comparability helps acquirers make better acquisition-investment decisions and thus fosters more efficient capital allocation.

Authors

• Richard D Mergenthaler, The University of Iowa

• Ciao-Wei Chen, The University of Iowa

• Daniel W Collins, The University of Iowa

• Todd Kravet, The University of Texas at Dallas