Target’s earnings quality and bidders’ takeover decisions

This study examines how takeover decisions are influenced by the quality of information in target firms’ earnings. We show that bidders prefer negotiated takeovers in deals involving targets with poor earnings quality. Moreover, earnings quality and takeover premiums are negatively related in negoti...

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Bibliographic Details
Published in:	Review of accounting studies 2013-12, Vol.18 (4), p.1050-1087
Main Authors:	Raman, Kartik, Shivakumar, Lakshmanan, Tamayo, Ane
Format:	Article
Language:	eng
Subjects:	Accounting/Auditing Acquisitions & mergers Bids Business and Management Corporate Finance Decision making Information sources Public Finance Stock prices Stockholders Studies Target company
Online Access:	Get full text
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Summary:	This study examines how takeover decisions are influenced by the quality of information in target firms’ earnings. We show that bidders prefer negotiated takeovers in deals involving targets with poor earnings quality. Moreover, earnings quality and takeover premiums are negatively related in negotiated takeovers, suggesting that bidders obtain valuable private information through negotiations. We also find that bidders share information risk with target shareholders by paying with more equity for targets with poor earnings quality. These findings are driven primarily by the asymmetric information component of earnings quality (as opposed to the symmetric component) and are observed mainly in inter-industry takeovers, where asymmetric information concerns are greater, rather than in intra-industry takeovers. We conclude that targets’ earnings quality affects bidders’ takeover decisions, particularly in cases of large asymmetric information between targets and bidders.
ISSN:	1380-6653 1573-7136