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

Authors

  • Ervin L. Black,

    1. The authors are respectively from the School of Accountancy, Brigham Young University; the Department of Accounting and Finance, Berry College; the Department of Finance, University of Arkansas; and the Department of Accounting, University of Arkansas.
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  • Thomas A. Carnes,

    1. The authors are respectively from the School of Accountancy, Brigham Young University; the Department of Accounting and Finance, Berry College; the Department of Finance, University of Arkansas; and the Department of Accounting, University of Arkansas.
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  • Tomas Jandik,

    1. The authors are respectively from the School of Accountancy, Brigham Young University; the Department of Accounting and Finance, Berry College; the Department of Finance, University of Arkansas; and the Department of Accounting, University of Arkansas.
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  • B. Charlene Henderson

    Corresponding author
    1. The authors are respectively from the School of Accountancy, Brigham Young University; the Department of Accounting and Finance, Berry College; the Department of Finance, University of Arkansas; and the Department of Accounting, University of Arkansas.
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  • They thank Christopher Anderson, Larry Brown, Carolyn Callahan, Robert Lipe, Michael Mosebach, Katherine Schipper, Linda Vincent, Andrew Stark (an editor), an anonymous referee, and participants at the AAA 2001 Cross-border Mergers Conference, the AAA 2002 National Meeting and 2002 International Section Midyear Meeting, the Oklahoma State University Accounting Research Workshop, the Hawaii International Conference on Business and Auburn University, University of Arkansas and University of Missouri-St. Louis accounting workshops and University of Kansas finance workshop for their valuable comments. All remaining errors are solely the authors' responsibility.

* Address for correspondence: Thomas A. Carnes, Berry College, Mount Berry, GA 30149, USA.
e-mail: tcarnes@berry.edu

Abstract

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.

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