Search results

1 – 1 of 1
To view the access options for this content please click here
Article
Publication date: 2 March 2015

Joohyun Lim, Jaehong Lee and jinho Chang

This paper aims to examine the association between financial reporting quality in target companies and acquisition profitability in a sample of 280 acquisitions in South…

Downloads
1361

Abstract

Purpose

This paper aims to examine the association between financial reporting quality in target companies and acquisition profitability in a sample of 280 acquisitions in South Korea between 2002 and 2011.

Design/methodology/approach

Using the accruals quality measure developed by McNichols (2002) as a proxy for financial reporting quality, it was found that high-quality financial reporting in target companies is associated with more profitable acquisitions for the acquirer, as measured by the acquirer’s announcement returns.

Findings

It was found that high-quality financial reporting in target companies is associated with more profitable acquisitions for the acquirer, as measured by the acquirer’s announcement returns. This finding suggests that higher-quality accounting information leads to better decision-making during acquisitions. It was also found that the importance of financial reporting quality increases when information about the target company is scarce. In addition, it was found that the financial reporting quality of target companies is less important when the agency costs of the acquirer are high.

Practical implications

This analysis also complements several recent papers that examine target firm accounting information and mergers and acquisitions (M&A) returns (Shalev and Martin, 2009; McNichols and Stubben, 2012). By expanding this analysis, the authors help to provide a more complete understanding of how target firm’s accounting quality relates to the valuation of the target company and future expected synergies in M&A deal practice.

Originality/value

This study is one of a growing body of literature on the relations between financial reporting quality and investment decisions (Bens and Monahan, 2004; Biddle and Hilary, 2006; Hope and Thomas, 2008; McNichols and Stubben, 2008; Biddle et al., 2009; Francis and Martin, 2010). These results extend and generalize the results of prior studies, in that data pertinent to acquisition profitability of M&As in South Korea are used.

Details

International Journal of Accounting & Information Management, vol. 23 no. 1
Type: Research Article
ISSN: 1834-7649

Keywords

1 – 1 of 1