Targets' Accounting Conservatism and the Gains from Acquisition*
Anwer S. Ahmed, Lucy Huajing Chen, Scott Duellman, Yan Sun
Contemporary Accounting Research · 2023 · Volume 40 · Issue 1
Abstract
We present evidence on the effects of target firms' accounting conservatism in a merger and acquisition transaction. Conservatism is distinct from other accounting or accrual quality constructs examined in prior work. Its unique features can lead to potential benefits for both the targets and the acquirers. The use of conservatism by targets reduces acquirers' risks of acquiring underperforming assets or overpaying for well-performing assets. In addition, targets' conservatism results in greater production of verifiable information that can help the acquirers better estimate and realize synergies of the combined firm. Consistent with these arguments, we find that firms with greater accounting conservatism are more likely to receive a bid. We also find that targets' conservatism increases the deal premium and the announcement returns of both the targets and the acquirers, respectively. Overall, these results indicate that conservatism provides benefits to both sellers and buyers of equity in an acquisition transaction.
Keywords
mergers and acquisitions, targets' accounting conservatism, acquisition gains, deal premium, announcement returns, information uncertainty, fusions et acquisitions, conservatisme comptable des entreprises cibles, gains tirés des acquisitions, prime de transaction, rendement après l'annonce, incertitude de l'information
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