Forcing private companies to disclose their financial statements will lead to more mergers and acquisitions (M&As) and better deals, according to a new paper published by a researcher from Bayes Business. School (formerly Cass).
The paper, published in Review of Financial Studiesfound that financial disclosure increases M&A activity by reducing information friction in the market for corporate control.
After the implementation of the 2003 European Commission (EC) directive on financial reporting, the study shows the positive spillovers associated with this regulation, countering the common perception that M&A deals are value-destroying in nature.
Evaluation of M&As
M&As are big and risky investment decisions for companies. Especially if the potential target is a private company, the scarcity of available information should be an obstacle for a potential acquirer.
To find out how the EU directive affects M&A deals, the researchers compiled detailed data from Zephyr, a comprehensive database of mergers and acquisitions. This method yielded 40,321 deals from 12 countries completed between 2001 and 2012, which they supported with financial targets after the completion of the deal.
Key findings from the research show:
- M&As of private targets have increased with the implementation of disclosure regulation. Consistent with the view that broader disclosure of financial information reduces the information conflict faced by potential acquirers, they also discovered that mandatory reporting intensity is positively related to M&A activity, even when accounting for in different ways to measure M&A activity.
- Using data on targets following an acquisition, the researchers found that more mandated industry disclosure led to a higher growth rate (measured by total assets) of the target after acquisition. -gain, but not necessarily better performance. In contrast, an increase in target-specific disclosure requirements is associated with greater growth and improved post-deal performance. This suggests that firm-specific information is the key driver of synergistic deals, while industry-specific information is not necessarily helpful in achieving the best match between acquirer and target.
Effects of mandatory disclosure
Co-author Dr. Francisco Urzúa, Reader in Finance at Bayes Business School (formerly Cass), said,
“Our study shows that more deals took place after the implementation of mandatory reporting in the EU, but not only that, the targets that disclosed thanks to this regulation improved their performance after the acquisition. That is, there a lot of better deals happened thanks to it.”
“Our empirical results support the argument that mandatory disclosure of financial information facilitates the identification of new deal opportunities, which ultimately leads to increased M&A activity and better performance got.”
“In many countries around the world, including Canada and the United States, private companies do not require financial reporting. , private companies in the US employ about two-thirds of the total employees of US. The findings of this paper point to a clear benefit from introducing some mandatory disclosure requirements for the largest private companies.”
Marcelo Ortiz et al, Mandatory Financial Disclosure and M&A Activities, The Review of Financial Studies (2023). DOI: 10.1093/rfs/hhad052
Provided by City University London
Citation: Mandatory EU financial disclosure increases frequency and quality of M&A deals, says study (2023, July 13) retrieved 15 July 2023 from https://phys.org/news/2023-07-mandatory-eu- financial-disclosure-frequency. html
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