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The Relevance of Target Accounting Quality to the Long‐Term Success of Cross‐Border Mergers

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  • Ervin L. Black
  • Thomas A. Carnes
  • Tomas Jandik
  • B. Charlene Henderson
Abstract
We investigate a sample of cross‐border mergers involving US firms that acquired foreign targets between 1985 and 1995. Our general interest is in the long‐term success of the acquisitions, measured by the post‐merger abnormal returns to the US acquirers. Our primary focus is the relationship between the quality of the foreign target's accounting disclosures and the acquisition's long‐term success. Employing a procedure recommended by Lyon et al. (1999), we find that US acquirers in cross‐border mergers experience significantly negative long‐term abnormal returns post‐merger. These returns also are significantly more negative than those realized by a matched sample of US acquirers that acquired US targets. To investigate the potential association between the US acquirers' post‐acquisition returns and target firms' accounting disclosures, we classify the merger transactions by target firm home country. We define variables to reflect the quality of accounting disclosures and control for other important country‐specific features. The results reveal that post‐merger abnormal returns are less negative for acquirers of targets based in countries where accounting data is less value relevant. This may be due to a higher cost of capital for target firms in these countries, resulting in a built‐in discount in the pricing of targets. An examination of the premiums paid in a subset of 79 cross‐border mergers reveals evidence consistent with this contention: premiums are lower for target firms based in countries where accounting data is less value relevant. These results suggest that shareholders of targets from such countries pay a price for their country's institutional framework that makes accounting information less value relevant.

Suggested Citation

  • Ervin L. Black & Thomas A. Carnes & Tomas Jandik & B. Charlene Henderson, 2007. "The Relevance of Target Accounting Quality to the Long‐Term Success of Cross‐Border Mergers," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1‐2), pages 139-168, January.
    • Handle: RePEc:bla:jbfnac:v:34:y:2007:i:1-2:p:139-168:a
    DOI: 10.1111/j.1468-5957.2006.00654.x
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    2. Navio-Marco, J & Solorzano-Garcia, M & Urueña, A., 2015. "Language As Key Factor Of Long-Term Value Creation In Mergers And Acquisitions In The Telecommunications Sector," 26th European Regional ITS Conference, Madrid 2015 127170, International Telecommunications Society (ITS).
    3. Juha‐Pekka Kallunki & Elina Pyykkö & Tomi Laamanen, 2009. "Stock Market Valuation, Profitability and R&D Spending of the Firm: The Effect of Technology Mergers and Acquisitions," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(7‐8), pages 838-862, September.
    4. Andriosopoulos, Dimitris & Yang, Shuai & Li, Wei-an, 2016. "The market valuation of M&A announcements in the United Kingdom," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 350-366.
    5. Pyykkö, Elina, 2009. "Stock market valuation of R&D spending of firms acquiring targets from technologically abundant countries," Journal of Multinational Financial Management, Elsevier, vol. 19(2), pages 111-126, April.
    6. Chen, Charles J.P. & Ding, Yuan & Xu, Bin, 2014. "Convergence of accounting standards and foreign direct investment," The International Journal of Accounting, Elsevier, vol. 49(1), pages 53-86.

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