Are Targets’ Disclosure of Internal Control Weaknesses Informative to Acquirers in Merger and Acquisition Decisions?
Student thesis: Doctoral Thesis
Related Research Unit(s)
Previous studies show that acquirers can make poor acquisition decisions and experience substandard post-acquisition results when they acquire targets with poor reporting quality. In this study, I examine whether a target’s disclosure of internal control weaknesses (ICWs) (a proxy for reporting quality) reduces information uncertainties for the acquirer and thus has the potential to guide the acquirer in making good acquisition decisions. Based on a sample of merger and acquisition transactions during 2005–2018, I find that acquirers offer low premiums and rely less on cash relative to stock payments when their targets disclose ICWs prior to the acquisition. Although targets with ICW have poor quality information, I find no evidence that deals with such targets are renegotiated or have negative influence on the acquirers’ post-acquisition performance and ICW. Further evidence shows that when acquiring targets with pre-acquisition ICW disclosure, acquirers experience lower returns while targets experience higher returns around the acquisition announcement. However, when premium is taken into consideration, the negative effect on acquirers’ return is mitigated. Overall, the results indicate that ICW disclosure by targets is informative to acquirers. Such disclosure improves acquirers’ ability to negotiate effectively and mitigates the negative effect of acquiring targets with poor reporting quality on post-acquisition performance. These findings highlight the relevance of ICW disclosure requirements.
- Information quality, Internal control weakness, Acquisition decision, Postacquisition performance