Date of Degree
PhD (Doctor of Philosophy)
This study examines whether the disclosure of private target firms' financial statements disciplines acquiring firms' managers to make better acquisition-investment decisions. The SEC requires public acquiring firms to disclose audited financial statements of targets that meet certain disclosure thresholds. Using hand-collected data, I first document that private targets' financial statements provide value relevant information to market participants. Next, consistent with my predictions, I find that the disclosure of private targets' financial statements is associated with higher acquirer announcement returns, better post-acquisition performance, and lower likelihood of post-acquisition divestitures. Finally, I find the disciplining effect of this disclosure requirement is more pronounced when monitoring by outside capital providers is more costly. In sum, the evidence suggests that the disclosure of private targets' accounting information is informative to market participants, disciplines managers' acquisition decisions, and improves acquisition efficiency.
Corporate disclosure regulations are designed to protect investors and facilitate efficient capital allocation in the economy. One important corporate disclosure is audited financial reporting, which improves capital allocation (investment) decisions through its valuation implications and its governance/disciplinary role. In the context of mergers and acquisitions (M&As), the existing studies tend to focus on the valuation implications of the target firm’s accounting information. Whether target firms’ audited financial statements play a disciplining role in M&As remains unexplored. This study fills this gap.
The Securities and Exchange Commission (SEC) requires public acquiring firms to publicly disclose target firms’ audited financial statements when the M&A transaction meets certain disclosure thresholds. Because these financial statements are disclosed after the transaction is completed, they provide the acquiring firms’ outside shareholders with a tool, subsequently to the transaction, to monitor the acquiring firms’ M&A decisions. Therefore, I posit that this disclosure requirement imposes a disciplinary mechanism on the acquiring firms’ managers when they make M&A decisions.
Using this unique setting and hand-collected data from the SEC’s EDGAR system, I provide evidence consistent with the hypothesis that the disclosure of private targets’ audited financial statements disciplines the acquiring firms’ managers in making M&A decisions. Specifically, I find the disclosure of private targets’ financial statements is associated with more profitable M&A transactions. Several other alternative explanations cannot explain the main findings.
Copyright 2015 Ciao-Wei Chen