During acquisitions, financial
disclosures can benefit buyers at
the target company’s expense.
BY LEE SIMMONS
Acquisitions are hard. Corporations don’t
come with price tags attached, so a would-
be buyer has to decide how much to offer.
Bid too little and you lose out to a rival. Bid
too much and you take a bath on the deal
— and likely earn a prompt, derisive slap to
your stock price as soon as you announce it.
The main challenge is figuring out
how much the target firm is worth. Of
course, any business valuation is fraught
with uncertainty. But when it comes to
acquisitions, that risk is compounded by
information asymmetry: The target firm
usually knows more about its own market
and assets than the would-be buyer does.
That’s why suitors pore over the
company’s financial statements, looking for
insights that might help them project future
cash flows. “The better the accounting
information, the more accurately they
can value the company,” says Maureen
McNichols, an accounting professor at
Stanford GSB. “So we wondered, does that
let them bid more effectively and ultimately
To find out, she and Stephen Stubben
of the University of Utah analyzed more
than 2,400 deals between 1990 and
2010, measuring stock appreciation for
buyers and sellers as an indicator of the
profitability for each side. Their study found
that when a target firm has high-quality
financials, the acquirer benefits — although
at the expense of the target’s shareholders.
For entrepreneurs dreaming of
a lucrative buyout, is good accounting
actually bad business?
Maureen McNichols is the
Marriner S. Eccles Professor of
Public and Private Management
at Stanford GSB.
Illustration by Gracia Lam