International Mergers and Acquisitions Laws, the Market for Corporate Control, and Accounting Conservatism

Abstract

Exploiting the staggered enactment of country‐level mergers and acquisitions (M&A) law as an exogenous increase in corporate takeover threat, this paper examines how a disciplinary market for corporate control affects accounting conservatism. Following M&A law adoption, we find increased accounting conservatism, with more pronounced effects in countries with weak shareholder protection and in those experiencing larger growth in takeover activity. Further analysis reveals that elevated takeover threats increase conservatism through changes in capital structure and investment decisions as well as improvements in board monitoring. Our findings highlight the importance of the market for corporate control in shaping financial‐reporting outcome.

How does the Market for Corporate Control Impact Tax Avoidance? Evidence from International M&A Laws

“…For instance, the widespread antitakeover mechanisms in the U.S. such as poison pills or staggered boards are often prohibited in Austria and Brazil. Countries outside of the U.S. also enact M&A laws with provisions unique to their institutional features (Khurana and Wang 2019). In general, the takeover acts are regarded as effective means to alleviate regulatory uncertainty and reduce the costs and inefficiencies associated with corporate takeovers (Gordon 2003;Nenova 2006).…”

“…The private-benefits agency prediction suggests a greater decrease in tax avoidance among firms with more severe pre-law agency problems as these firms likely benefit more from improved managerial discipline from the takeover market. We follow Khurana and Wang (2019) and use the average increase in CEO pay-performance sensitivity (PPS) in the post-law period to capture the improvement in board monitoring effectiveness. We also use the degree of earnings management to measure the severity of pre-law agency conflicts, as prior literature suggests that complex and opaque tax avoidance activities increase the latitude for other means of rent diversion and elevate earnings manipulation to mask the rent diversion Dharmapala 2006, 2009;Chen, Chen, Cheng, and Shevlin 2010;Kim, Li, and Zhang 2011).…”

“…First, we contribute to the literature examining the impact of the takeover market and, in particular, the consequences of international M&A laws, on corporate decisions and policies. A few studies document significant real effects of enacting M&A laws, including enhanced managerial discipline (Lel and Miller 2015), increased dividend payouts (Glendening et al 2016), elevated accounting conservatism (Khurana and Wang 2019), and reduced stock price crash risk and earnings management (Balachandran et al 2018;Sul 2019). We extend this line of research by focusing on tax avoidance, an important but previously ignored corporate decision in this setting.…”

Impairment Losses and Debt Characteristics: A Multi-Country IFRS Study.

“…The revised empirical literature also does not consider that debt attributes such as maturity and type of creditor can influence the accounting for impairment losses. The same applies to articles where the focus is on conditional conservatism, without studying impairment losses Riedl (2004), Khan & Watts (2009), Ball et al (2013a), André et al (2015, Banker et al (2017), Khurana & Wang (2019).…”

“…This paper is primarily motivated by lack of empirical studies focusing on how information asymmetries between firm and creditors is related to the propensity for accounting recognition of economic losses through accounting impairments. Although accounting impairments are an important mechanism of conditional conservatism, the extant literature on accounting impairment and conditional conservatism considers leverage as a continuous and one-dimensional independent variable (Riedl 2004, Khan & Watts 2009, Ramanna & Watts 2012, Ball et al 2013b, André et al 2015, Banker et al 2017, Gunn et al 2018, Khurana & Wang 2019. These studies make no distinction as to the heterogeneity in information asymmetry levels between firm and creditors.…”