The Disciplinary Role of Financial Statements

Evidence from Mergers and Acquisitions of Privately Held Targets

Research output: Contribution to journalArticle

Abstract

This study examines whether requiring the disclosure of audited financial statements disciplines managers’ mergers and acquisitions (M&As) decisions. When an M&A transaction meets certain disclosure thresholds, the Securities and Exchange Commission (SEC) requires the public acquirer to disclose the target's audited financial statements after the merger is completed. Using hand-collected data, I find that the disclosure of private targets’ financial statements is associated with better acquisition decisions. Furthermore, I find that this disciplining effect of disclosure is more pronounced when monitoring by outside capital providers is more difficult and costly, and when other disciplining mechanisms are weaker. Finally, these findings are robust to several alternative explanations, such as monitoring from blockholders and voluntary disclosures. In sum, the evidence suggests that the ex post mandatory disclosure of private targets’ accounting information disciplines managers’ acquisition decisions and improves acquisition efficiency.

Original languageEnglish (US)
Pages (from-to)391-430
Number of pages40
JournalJournal of Accounting Research
Volume57
Issue number2
DOIs
StatePublished - May 1 2019

Fingerprint

Disclosure
Financial statements
Mergers and acquisitions
Managers
Monitoring
Mergers
Blockholders
Mandatory disclosure
Accounting information
Voluntary disclosure
Securities and Exchange Commission

Keywords

  • disciplinary role
  • disclosure
  • G34
  • M40
  • M41
  • M48
  • mergers and acquisitions
  • private firms

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

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abstract = "This study examines whether requiring the disclosure of audited financial statements disciplines managers’ mergers and acquisitions (M&As) decisions. When an M&A transaction meets certain disclosure thresholds, the Securities and Exchange Commission (SEC) requires the public acquirer to disclose the target's audited financial statements after the merger is completed. Using hand-collected data, I find that the disclosure of private targets’ financial statements is associated with better acquisition decisions. Furthermore, I find that this disciplining effect of disclosure is more pronounced when monitoring by outside capital providers is more difficult and costly, and when other disciplining mechanisms are weaker. Finally, these findings are robust to several alternative explanations, such as monitoring from blockholders and voluntary disclosures. In sum, the evidence suggests that the ex post mandatory disclosure of private targets’ accounting information disciplines managers’ acquisition decisions and improves acquisition efficiency.",
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