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

Maureen F. McNichols, Stephen R. Stubben

Review of Accounting Studies · 2015 · Volume 20 · Issue 1

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

Enable JavaScript for citation tools and additional paper interactions.