The effect of target-firm accounting quality on valuation in acquisitions

Maureen F. McNichols and Stephen R. Stubben ()
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Maureen F. McNichols: Stanford University
Stephen R. Stubben: The University of Utah

Review of Accounting Studies, 2015, vol. 20, issue 1, No 4, 110-140

Abstract: Abstract We examine whether acquisitions are more profitable for acquirers when the firms they target disclose higher-quality accounting information. If accounting information reduces uncertainty in the value of the target firm by facilitating a more precise valuation, we predict that managers of the acquiring firm can bid more effectively and pay less to acquire a target firm that has high-quality accounting information. Using a large sample of acquisitions of public firms from 1990 to 2010, we find evidence consistent with our prediction. Specifically, when target firms have higher-quality accounting information, acquirer returns around the acquisition announcement are higher and target returns are lower—consistent with acquirers capturing a greater portion of acquisition gains by paying less for target firms. These findings, which are robust to a variety of controls and alternative measures of uncertainty and accounting quality, suggest that higher-quality accounting information leads to better bidding decisions in acquisitions.

Keywords: Acquisitions; Accounting quality; Valuation (search for similar items in EconPapers)
JEL-codes: G34 M41 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s11142-014-9283-x

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