Target Financial Reporting Quality and M&a Deals That Go Bust

16991 Words 68 Pages
Target Financial Reporting Quality and M&A Deals that Go Bust*
HOLLIS A. SKAIFE, University of Wisconsin–Madison DANIEL D. WANGERIN, Michigan State University

1. Introduction This study investigates whether target firms’ financial reporting quality affects the likelihood that merger and acquisition (M&A) deals will ultimately be terminated. Managers looking to increase their market share, enter new markets, or diversify their operations will consider acquiring another company based on the company’s performance, geographic locations, and lines of business, respectively. If the potential target is a U.S. publicly traded company, an acquirer’s initial assessment of the expected benefits associated with the acquisition of the company is based
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The first three measures are intended to capture noise and ⁄ or bias in financial reporting that affects the relevance and representational faithfulness of the target’s financial statements. Greater discretionary accruals, greater likelihood of internal control problems, and more off-balance-sheet liabilities are indicators of less reliable, less relevant, low-quality financial reporting. The last two measures are used to assess the precision of the target’s financial information where greater analysts’ forecast error and greater analysts’ forecast dispersion signal less precise, less certain, low-quality financial reporting related to targets’ performance and operations. We combine these measures to construct a low-quality financial reporting (LQFR) score and use this score in our empirical tests examining the M&A market consequences of targets’ financial reporting quality.
* Accepted by Dan Segal. We appreciate the comments and suggestions of Dan Segal, an anonymous reviewer, Xia Chen, Jeremiah Green, Antonio Macias, David Veenman, Terry Warfield, participants at the 2010 AAA annual meeting, and workshop participants at the University of Amsterdam, University of California–Irvine, University of Edinburgh, Santa Clara University, and the University of Wisconsin– Madison.

Contemporary Accounting Research Vol. 30 No. 2 (Summer 2013) pp. 719–749 Ó CAAA

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