Impact of Financial Reports textual properties in M&A Transactions

Abstract

This study aims to examine whether the quality of the acquirer financial report has any effect on merger risk of a failure, and therefore on the arbitrage spread. Financial reports are an important means through which firms convey valuable and decision-useful information to various stakeholders. Low quality of those reports may interfere with the proper communication of information with the market participants and therefore lose shareholders and stakeholders’ support in important decisions such as a takeover. This in turn would result in higher uncertainty of completion of the deal. More specifically, low-quality financial reports would increase the uncertainty of completion of a deal and therefore larger arbitrage spread due to several reasons. First, at the acquirer level, conflict of interests between shareholders and stakeholders which potentially arises from poor information environment would lead to higher completion uncertainty of a takeover transaction. Second, acquirer with low quality financial reports would have limited access to capital which would result in financial uncertainty. Third, low-quality financial report could also increase the regulatory challenges and therefore higher uncertainty of completion of the deal. Finally, target shareholders would be more likely to oppose the acquisition attempts by an acquirer with low quality financial reports.