Target Firm Accounting Quality and Valuation Effects: An Event Study

Frederik Marcus Dannevang

Student thesis: Master thesis

Abstract

This thesis investigates whether evidence exist in favor for target accounting quality being a determinant of valuations during public acquisitions. This is examined by studying the returns realized during announcements of public acquisitions and extracting the patterns related to target accounting quality, controlling for other uncertainties. Controlling for other uncertainties open up for examining the incremental effect of either poor or high-quality target accounting information on returns. Specifically, the thesis utilizes two measures of accounting quality and various measures of uncertainties that are both related firms’ inherent uncertainty, deal specific uncertainties, and other dynamics found in the literature affecting acquisition returns. Then, two main econometric models are build based on the previous dynamics. The econometric models are tested on a dataset of US acquisitions consisting of dealsfrom1990 to 2017. Inferences are drawn on the results, and two main findings are presented. Target returns are significantly negatively associated with higher degrees of accounting quality, when applying The Modified Dechow & Dichev Model (2002) as measurement tool for accounting quality and when inherent firm uncertainty is controlled by cash flow volatility. No significant patterns are evident on the relation between acquirer returns and target accounting quality. The significant relationship between target returns and target accounting quality is not robust to Dechow & Dichev’s (2002) standard model of accounting quality or a proxy of inherent firm uncertainty based on stock return volatilities. The thesis suggests an explanation for this. Lastly, the thesis suggests further research topics that would aid the accounting quality literature grow more profound. This includes development of more precise measures of accounting quality and measures of inherent firm uncertainties that better captures the dynamics related to returns during public acquisition announcements

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2018
Number of pages96