An empirical analysis of the decline of financial reporting quality following M&A
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Abstract
I examine whether an acquirer's financial reporting quality declines after an M&A, and if so, how it changes over time. If an acquirer's financial information conveys inherent information uncertainty, and/or a manager of the firm is not motivated to do M&A by economic reasons, I predict that investors rationally create a lower price response to financial reporting for the firm, and have difficulty in valuing the firm after an M&A. Specifically, I expect acquirers (1) with higher information uncertainty; foreign targets, private targets, and inter-industry acquirers, and (2) with agency-motivated management to have more severe decline in financial reporting, and thus take longer time to recover over time following M&As. Using a sample of quarterly data of U.S. public acquirers over the period 1991-2010, I find evidence that acquirers experience a decline in financial reporting quality, measured by the earnings response coefficient (ERC), and that their financial reports are less value relevant following M&As. Also, I find that investors keep lower price reactions to financial reporting over time while recovering their valuations two quarters after M&As. With respect to the ERC results, I find that investors show lower price response to acquirers with foreign targets than acquirers with domestic targets. Also, I find that investors think acquirers with private targets experience less of a decline in financial reporting quality than acquirers with public targets.
However, I fail to find that investors show less investor reaction to the quality of financial reporting for inter-industry acquirers later after M&A. With respect to the value relevance results, I find that the results are similar to the ERC results for foreign and private targets, but found that the value relevance of earnings of acquirers with inter-industry targets is lower than that of acquirers with inter-industry targets. For a management motivation for M&A, my ERC results show that it is not clear that there is a quality difference in financial reporting of both agency-motivated and synergy-motivated acquirers. With respect to value relevance, investors think the value relevance of earnings for agency-motivated acquirers is less than that of synergy-motivated acquirers after M&A.
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Thesis (Ph.D.)--Boston University