Informativeness of Internal Control Weakness Disclosure on Acquirers' M&A Decisions

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Author(s)

Detail(s)

Original languageEnglish
Journal / PublicationAccounting Horizons
Online published8 Sept 2023
Publication statusOnline published - 8 Sept 2023

Abstract

We empirically examine the relevance of the disclosure of internal control weaknesses (ICWs) by target firms for acquirers in making their merger-and-acquisition (M&A) decisions. We find that acquirers offer lower premiums for targets that disclose ICWs (ICW targets) before acquisition in comparison with targets that disclose effective internal controls (non-ICW targets). We also find that acquirers offer less cash (versus stock) for ICW targets in comparison with non-ICW targets. Overall, results indicate that ICW disclosure by targets is informative to acquirers. Practically, we contribute to the literature by identifying the relevance of ICW disclosure as a reliable public source of information that can help mitigate the negative impact on acquirers acquiring target firms with poor financial reporting quality.

Research Area(s)

  • acquisition decision, disclosure of internal control weakness, information quality, merger and acquisition