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Accounting Conservatism and the Choice of Method of Payment in Corporate Acquisitions

Qingfu Chai[footnoteRef:1] Dimitrios Vortelinos[footnoteRef:2] Huainan Zhao[footnoteRef:3] [1: Lincoln International Business School, University of Lincoln, UK; Email: [email protected]] [2: Corresponding author: Lincoln International Business School, University of Lincoln, UK; Tel.: +44 1522 835634; Email: [email protected]] [3: School of Management, Cranfield University, UK; Tel.: +44 1234 754360; Email: [email protected]]

Abstract

Accounting conservatism refers to a generally accepted accounting principles selection criterion that leads to persistent understatement of income and assets and/or overstatement of expenses and liabilities over a multi-period of time. Previous studies find that such persistent overstatement of debt and/or loss by conservative reporting may lead to a ‘weakened’ appearance of a firm’s financial position and/or profitability, thus, accounting conservatism may exacerbate financial constraints so that it may impede firms accessing debt financing and induce firms’ preference for stock financing. In planning the merger and acquisition financing, acquirer firms with greater conservative financial reporting would less like to use debt financing. We use a large sample of 7505 U.S. merger and acquisitions deals from 1980 to 2012. We find a significantly negative relation between accounting conservatism and the proportion of cash used in the acquisition payment, and we also find that acquirer firms with greater conservative financial reports would be less likely to choose the all-cash payment.

Keywords: Accounting conservatism, Acquisitions, Cash

1. Introduction

This paper examines whether or not accounting conservatism determines the choice of merger and acquisition payment method. Previous studies find that the choice of merger and acquisition payment is determined by management, firm, industry, and macroeconomic levels of non-accounting factors. Study on the relation between merger and acquisition payment and accounting related topics is limited. The purpose of this study is to fill this gap and address the question on whether or not accounting conservatism shows effects on their merger and acquisition financing decisions. We empirically investigate the relation between accounting conservatism and firms’ merger and acquisition payments using a large sample of 7505 deals announced and completed between 1980 and 2012. With various accounting conservatism measurements, we find that the likelihood of mergers and acquisitions that are paid entirely in cash is negatively related to the conservativeness of acquirer firms’ financial reporting, and the fraction of acquisitions paid with cash versus stock is also negatively related to accounting conservatism. These findings support the previous research that firms with conservative financial statements are likely to use equity to finance their investment projects (Lee (2011)).

In textbooks, accounting is called ‘the language of business’, therefore, which approach firms’ accounting information is provided, e.g. aggressive or conservative, should be a factor in determining firms’ investment and financing decisions. Accounting conservatism has a long history in accounting research, and it refers to a generally accepted accounting principles selection criterion that leads to persistent understatement of income and assets and/or overstatement of expenses and liabilities in a long-term. A firm considered as providing conservative financial reporting will continuously make such accounting choice in the longer-term, not temporarily over one or two years.

In the accounting literature, accounting conservatism reduces the cost of capital and benefits lenders and borrowers in external debt contracting (e.g. Ahmed and Duellman (2002), Beatty, Weber, Yu (2008), and Zhang (2008)). Accounting conservatism also reduces the cost of equity (e.g. Kim et al. (2013)). Researchers also find that accounting conservatism induces firms to use cash efficiently (Louis, Sun, and Urcan (2012)), and firms with conservatism exhibit financial inflexibility and are likely to issue equity (Lee, 2012). In merger and acquisition literature, cost of capital, financial flexibility and debt and equity preference are closely related to mergers and acquisitions financing activities (Bharadwaja and Shivdasani (2003) and Martybivaa and Renneboogb (2009)). Therefore, we expect accounting conservatism would affect merger and acquisition payment choices.

Building on the two fields of literatures, the persistent overstatement of debt and/or loss by conservative reporting may lead to a ‘weakened’ appearance of firms’ financial position strength and/or profitability, thus, accounting conservative may exacerbate financial constraint so that it impedes firms accessing debt financing and induces firms’ preference to issue stock (Lee, 2012). In the context of choosing the method to finance their mergers and acquisitions, we predict firms with conservatism are less likely to use all cash or increase the percentage of cash in the payment for the deal.

To empirically test the prediction, we use a large sample of U.S. 7505 merger and acquisition deals[footnoteRef:4] from 1980 to 2012. In order to show this long-term and persistent conservative accounting behaviour, we follow previous studies, such as Beatty, Weber, Yu (2008), Zhang (2008), Louis, Sun and Urcan (2012) and Kim et al (2013), to use firm-specific accounting conservatism measures, 3-year-accumulated non-operational accruals; accumulated non-operational accruals and 5-year-average non-operational accrual are the main measurement of accounting conservatism. Besides, we also follow previous research, such as Ahmed and Duellman (2002, 2007 and 2013), Francis and Martin (2010), and Kravet (2014), to use Basu’s (1997) asymmetric timeliness of earnings to measure accounting conservatism. [4: This sample includes firm acquisition, i.e. mergers and acquiring majority of interest of target firms, and assets acquisition, i.e. acquiring certain assets and acquiring a division from the target firms. Financial firms (SIC code 6000-6999) and utility firms (SIC code 4900-4999) are excluded.]

Consistent to our hypothesis, we find a significantly negative relation between accounting conservatism and the proportion of cash used in the acquisition payment, and we also find a significantly negative relation between accounting conservatism and the probability of all cash payment.

This study makes several contributions. First, this study contributes to accounting conservatism literature. Prior well-documented literatures study how conservatism accounting policy mitigates the bondholder and shareholder conflicts and reduces the cost of debt, e.g. Ahmed et al. (2002), and how conservatism accounting policy plays a role in firm’s debt contracting, such as Zhang (2008), Beatty et al. (2008) and Gigler et al. (2009). The relationship between accounting conservatism and corporate decisions ‘is lacking in the literature’[footnoteRef:5]. This study fills this gap. A related study by Lee (2012) finds that conservative accounting leads to financial inflexibility and the likelihood of stock financing; however, he does not consider the interplay between investing and financing. This study goes beyond the previous research and explores how the conservatism accounting principle influences firms’ financing choice when they confront acquisitions, the largest corporate investment projects. Other related studies, Francis and Martin (2010), focuses on the association of accounting conservatism and good merger and acquisition outcomes and Kravet (2014) discusses the relation between accounting conservatism and merger and acquisition risks. Our study focuses on the association of accounting conservatism and acquisition financing decisions. [5: Cited from Roychowdhury (2010).]

Second, this study also contributes to literature on the effects of accounting on firms’ decisions. Previous studies lack research on the relationship between financial reporting on corporate decisions (Armstrong et al. (2010)). Studies on financial reporting and merger and acquisition decisions are rare. Within the range of my literature knowledge, Erickson and Wang (1999) find that acquiring firms manage earnings upward in the period prior to the stock to stock merger agreement and they also find that ‘the degree of income increasing earnings management is positively related to the relative size of the merger’. This study fills the literature gap by using conservative accounting to explain the interdependence between investment (acquisition) and financing.

Third, this study contributes to the corporate finance literature on the interrelation between financing and investment. Previous studies find that firms would choose cash as the payment for their acquisitions, when the acquirer firms have excess free cash flow, (Jensen (1987)), or they are controlled by a major shareholder, (Amihud et al. (1990), Stulz (1988) and Jung, Kim, and Stulz (1996)), or their managers have large stockholdings (Amihud, Lev, and Travlos (1990) and Martin (1996)), or their managers have information that external investors do not have (Myers and Majluf (1984)), or the acquirer firms are large (Faccio and Masulis (2005)), or the acquirer firms have at least two bidding competitors (Berkovitch and Narayananor (1990)), or the acquirer firms have sufficient debt capacity (Martin (1996) and Faccio and Masulis (2005)), or the acquirer firms are managed by overconfident CEOs (Malmendier and Tate (2008)). On the other hand, acquirers firms would be likely to choose stock as the payment for their acquisition, when the acquirer firms have growth opportunities (Martin (1996)), or acquirer firms use the Pooling of Interest accounting method (Robinson and Shane, (1990, or the relative size of target to bidder is large (Hansen (1987), Martin (1996),and Faccio and Masulis (2005)), or there is market misevaluation (Shleifer and Vashiny, (2003) or acquirer firms’ industries have high M&A liquidity during the merger wave (Harford (2005)), or acquirer firms pre-acquisition leverage deviation is high (Hartford, Klasa and Walcott (2009) and Uysal (2011)). In summary, according to previous studies, the choice of merger and acquisition payment is determined by management-, firm-, industry-, and macroeconomic- level of factors. However, the relation between accounting standards and practice and mergers and acquisitions has been drawn less attention. Ours study fills this gap and explains that conservative accounting policy is an important factor that constrains firms’ debt financing ability and affects firms’ financing decisions for investments.

Finally, this study contributes to the merger and acquisition literature on firms’ bidding behaviour and the choice of payment. Previous studies report that bidder firms’ size (Moeller, Schlingemann, and Stulz (2004)), growth opportunities (Martin (1996)), and leverage (Usyal (2011)) influence the bidding behaviour as well as the payment method of acquisitions. Besides these factors, this study indicates that accounting conservatism leads to a relatively weak financial position so that it reduces firms’ ability to access debt capital. Therefore, it impedes firms from using debt (or cash) to pay for the deal.

The paper is organized as follows. Section 2 provides sample selection. Section 3 provides the empirical findings. Section 4 draws conclusions based on the findings.

2. Data and sample construction

The construction of the full sample is from the Security Data Corporation (SDC) database and we match the sample to Center for Research in Security Prices (CRSP) and Compustat. The procedure of sample selection is detailed in the following four steps.

First, we require the acquisitions are announced and complete between the beginning of 1980 and the end of 2012. We also require no missing data in Value of Transaction (SDC: VAL) which is defined as ‘the total value of consideration paid by the acquiror, excluding fees and expenses’. Following Fuller, Netter and Stegemoller (2002) and Uysal (2011), excluding financial firms (6000-6999) and utilities firms (4900-4999).

Second, we follow Uysal (2011) to require the relative size of target to bidder is at least 1%. The Relative Size is calculated as Value of transaction divided by the market capitalization, calculated as share price (CRSP: PRC) multiplies the number of shares outstanding (CRSP: SHROUT), of the bidder one fiscal year prior to the announcement date.

Third, in order to study the proportion of bids paid in cash or stock, we exclude deals whose payment are coded in ‘cash only’ and ‘stock only’ but their corresponding percentage of cash or stock are missing or unequal to 100. And we also exclude those coded in ‘cash and stock combination’ but the sum of percentage of cash and stock is unequal to 100.

Fourth, we require that all observations have sufficient data to calculate primary accounting conservatism measures. This leaves us a total sample of 7505 deals.

Table 1 reports the distribution of the sample of 7505 deals from 1980 to 2012

Like Francis and Martin (2010), the number of acquisitions peaks in 1998. Table 3.1 also shows the trend, which is similar to Dong et al. (2006) who find deals made in the 1990s are more ‘supportive’ of misvaluation hypothesis. After 2001, more deals are paid in cash.

3. Empirical Results3. 1 Descriptive Statistics

This part provides the winsorized[footnoteRef:6] descriptive statistic results of samples. Table 3.2 reports the descriptive statics of firm and deal characteristics in the sample including 7505 deals from 1980 to 2012. [6: To eliminate the effect of outliers, all variables are winsorized at the top and bottom 1% levels.]

In Table 2, the mean 3-year-accumulated non-operational accruals, Accumulated non-operational accruals and 5-year-average non-operational accrual are 0.115, 0.028 and 0.043 respectively. The mean book leverage and market leverage are 0.209 and 0. 177. Average Log sales is 5.648. The mean of Market to book ratio is 2. The profitability is 0.16. The percentage of cash in the payment is 0.612 and the relative size of target to bid is 0.288. The average percentage of cash component in the deal payment is 0.612.

Table 3 reports the summary statistics of the acquirer sample classified by payment methods.

Overall, during 1980 to 2012, 4131 deals are paid by cash, 2231 by stock and 1142 by cash and stock mix. All firm characteristic variables are measured in the year prior to the deal announcement. The median (mean) of 3-year-accumulated non-operational accruals is 0.056 (0.092) for cash deals, 0.069 (0.141) for stock deals and 0.068 (0.144) for mix deals. The median (mean) of Accumulated non-operational accruals is 0.011(0.021) for cash deals, 0.013 (0.037) for stock deals and 0.014 (0.034) for mix deals. The median (mean) of 5-year average accruals is 0.021 (0.037) for cash deals, 0.028 (0.051) for stock deals and 0.025 (0.055) for mix deals. The results show that stock payment is relating to higher average accounting conservatism proxies indexrs.

The median (mean) of s market to book is 1.866 (1.574) for cash deals, 2.658 (1.969) for stock deals and 2.132 (1.654) for mix deals. Consistent with effects of growth opportunity Martin (1996) and stock market overvaluation, Shleifer and Vishny (2003), higher market to book ratio and higher stock returns increase the probability of stock financing.

The median (mean) of s market leverage is 0.194 (0.144) for cash deals, 0.15 (0.075) for stock deals and 0.166 (0.103) for mix deals. The results of leverage is mixed, the leverage may not be the only factor to determine the payment method.

The median (mean) of s relative size of target to acquirer is 0.193(0.074) for cash deals, 0.341 (0.12) for stock deals and 0.326 (0.141) for mix deals. Consistence to Faccio and Masulis (2005) the relative size and percentage of cash in the payment are negatively related.

More than 40% of subsidiary targets are paid by cash, consistent to Faccio and Masulis (2005), firms ‘selling subsidiaries are often motivated by financial distress concerns or a desire to restructure toward their core competency’, therefore ‘there is a strong preference for cash consideration’.

3.2 The association of accounting conservatism and merger and acquisition payment choices –Accounting conservatism and proportion of cash component in the deal paymentIn this section, following Faccio and Ronald (2005), we use tobit regressions to show the relation between accounting conservatism and the proportion of cash component in the merger and acquisition payment.

In Table 4, Model 1 shows that the higher the accounting conservatism, the lower the proportion of cash in the payment. The results shows that increase in 3-year-accumulated non-operational accruals will reduce 0.33% of cash paid for the acquisition. Model 2 indicates that the higher the accounting conservatism, the lower the proportion of cash in the payment. The results shows that increase in accumulated non-operational accrual will reduce 1.43% of cash paid for the acquisition. Model 3 demonstrates that the higher the accounting conservatism, the lower the proportion of cash in the payment. The results shows that increase in 5-year-average non-operational accrual will reduce 0.67% of cash paid for the acquisition.

As to other firm and deal characteristics, Table 4 also show that firms whose market to book ratio is higher are less likely to pay for the deal with cash and have lower proportion of cash in the payment, consistent to previous studies such as Jung, Kim, and Stulz (1995), Martin (1996), Shleifer and Vishny (2003) and Uysal (2011). Firms with higher stock return in the pre-acquisition year would less likely to pay for the deal with cash or increase the percentage of cash in the payment (Uysal, 2011). Besides, large acquirer firms are likely to use finance the acquisitions with cash or higher percentage of cash (Uysal, 2011). Also, we find that profitable acquirer firms are more likely use cash or higher component of cash to finance their deals. The larger the size of target to acquirer, the less likely the firm will and the lower percentage of cash will be paid for the deal. When competing with other acquirers, firms are likely to use cash. Acquirers will not likely to use cash to pay for the deal using pooling of interest method.

3. 3 The association of accounting conservatism and merger and acquisition payment choices –All-Cash or All-Stock

This section investigates the relationship between accounting conservatism and probability of the deal is financed by cash only. Following previous studies such as Martin (1996), Malmendier and Tate (2008), and Usyal (2011), we use Cash (Stock) only as the dependent variable, the dummy variable, equals to 1 if the deal is paid by cash (stock) only, otherwise 0.

The samples include deals from 1980 to 2012. Following previous literatures, such as Faulkender and Wang 2006, Uysal (2011), Francis, Hasan, and Wu (2013), the financial firms (SIC Code 6000-6999) and regulated utilities firms (SIC Code 4900-4999) are excluded.

Table 5 shows the probit regression results of the relationship Accounting Conservatism and All-Cash payment. In this table, accounting conservatism is measured by 3-year-accumulated non-operational accruals, accumulated non-operational accruals, and 5-year-average non-operational accruals..

The results in Table 5 indicate accounting conservatism has negative and significant effect on the probability of all-cash financed deals, in another word, the more conservative the firms’ financial reporting, the less likely such firm will use all-cash to finance for their acquisitions. All Models report significant results between accounting conservatism and merger and acquisition payment. Model 1 shows that 1% increases in 3-year-accumulated non-operational accruals will reduce more than 0.27% of probability that the firm finance for the acquisition by cash only. Model 2 shows that 1% increases in the accumulated non-operational accrual will reduce more than 1% of probability that the firm finance for the acquisition by cash only. Model 3 shows that 1% increases in the 5-year-average non-operational accrual will reduce more than 0.52% of probability that the firm finance for the acquisition by cash only.

Table 6 shows the probit regression results of the relationship Accounting Conservatism and All-Stock payment. In this table, accounting conservatism is measured by 3-year-accumulated non-operational accruals, accumulated non-operational accruals, and 5-year-average non-operational accruals.

In Model 1, 1% increases in the 3-year-accumulated non-operational accruals will increase 0.16% of probability that the firm finance for the acquisition by stock only. In Model 2, 1% increases in the accumulated non-operational accrual will increase 0.94% of probability that the firm finance for the acquisition by stock only. In Model 3, 1% increases in the 5-year-average non-operational accrual will increase 0.30% of probability that the firm finance for the acquisition by stock only, but the result of is insignificant.

Collectively, the results of both Table 5 and 6 are consistent to our hypothesis, firm with conservatism financial reporting would less likely to finance their acquisition project with cash.

Other firm characteristics variables also have significant effects on the payment form. Acquirer firms with higher market to book ratio are less (more) likely to pay for the deal with cash (stock), consistent to previous studies such as Jung, Kim, and Stulz (1995), Martin (1996), Shleifer and Vishny (2003) and Uysal (2011), who find that firm with large growth opportunities and stock overvaluation are less likely to use cash to finance the mergers and acquisition. Firms with higher stock return in the pre-acquisition year would less likely to pay for the deal with cash (Uysal, 2011). Besides, large firms are can better access to debt markets due to more stable cash flows (Titman and Wessels, 1988), thus, they are more (less) likely to use all-cash (all-stock) to finance the acquisitions (Uysal, 2011). Also, we find that profitable acquirer firms are more (less) likely use cash (stock) to finance the deal, like the findings in Uysal (2011).

On the other hand, the deal characteristics variables also have significant effect on all-cash payment. The relative size of target to acquirer is also negatively (positively) significantly related to the probability of use all-cash (all-stock) as the payment, which is in line with Hansen (1987) and Faccio and Masulis (2005), acquirer firms have greater incentives to pay for the deal with stock when they access to asymmetric information about the target firms’ assets, and this information asymmetry is more likely to rise positively with the relative size of target assets to those of acquirers’ assets, furthermore, the acquirer firms’ risk from the acquisition activity increases with target firm size, and stock financing makes the target shareholders bear some of the risk of (Martin 1996 and Ayers et al. 2004). We also find that when there are more than one bidders for the same targets, firms are likely to use cash to ‘sweeten’ the deals by paying cash as a strategy to deter potential bidders (Berkovitch and Narayanan, 1990). Finally, we find acquirer firms are also less likely use cash when their industries have high mergers and acquisitions liquidity, similar to the finding of Harford (2005) and Uysal (2011). Similar to Uysal (2011), we find the acquirers are unlikely (likely) to pay for the deal with all cash, if the target is a Public target firm or a Private target firmate firm.

3.4 The association of accounting conservatism and merger and acquisition payment choices under the purchase method

Since firms are likely to use stock to bid based under the pooling of interest method, in order to show whether or not accounting conservatism shows effects on payment method based on same accounting method, we eliminate all the deals using pooling of interest method, following Aboody et al. (2000) and use a subsample labelled as ‘Purchase method only’. We use both ordered probit regressions and tobit regressions to work out the results[footnoteRef:7]. [7: We also use probit regressions with dependent variable of cash only and stock only respectively, the unreported results are similar to table 3.6, 3.7 and 3.8.]

According to accounting method for mergers and acquisitions, we find those acquirer firms using pooling of interest method are less likely to use all-cash to finance the acquisition. This is due to guidelines of using the pooling of interest method. Unlike purchase method, in the pooling method, the book value rather than fair market value of the target firms’ assets, liabilities, and equities are simply added to the acquirer firms, no purchase price allocation, no goodwill recognition, amortisation or impairment. Using pooling of interest method, the firm should meet specific criteria, e.g. this method cannot be used, in pure cash offers since the acquired firm’s stockholders maintain an ownership position in the merged firm (Huang and Walkling, 1987).

Overall, Table 7 shows that neither pooling of interest method or the purchase method would show no effect on the negative relation between accounting conservatism and the probability for the acquirer firms use all-cash payment and/or use the payment with high proportion of cash component

3.5 The association of accounting conservatism and merger and acquisition payment choices using Basu’s (1997) asymmetric timeliness of earnings

Basu’s (1997) asymmetric timeliness of earnings is widely used, although it has been received critics. For example, Roychowdhury (2010) argue that ‘Timely loss recognition by itself (without less timely gain recognition), does not result in the deferral of good news in earnings relative to bad news, nor is it sufficient to induce an understatement in net assets. ’

The primary measurement of accounting conservatism is using Basu’s (1997) model:

Earningst = β0 + β1*Dt + β2*Rett + β3*Rett* Dt + εt Eq. (1)

Where t indexes time, Earnings is income before extraordinary items scaled by market value of equity at the end of fiscal year, Ret is 12-month compound returns, which is three months after the fiscal year end. D, a dummy variable, equals to 1 when Ret is negative and 0 otherwise, and ε is the residual. Ret, stock returns, is used as a proxy for economic gains and losses. If the verification standard for losses is lower than for gains, earnings will recognise economic losses faster than gains. Therefore, the association between earnings and stock returns should be incrementally higher when stock returns are negative (Basu, 1997). Hence, the coefficient β3 on D*Ret measures the incremental timeliness of loss recognition in earnings relative to gains, i.e. accounting conservatism.

We use the baseline Basu (1997) model in Eq. (1) by including the choice of payment method for the deal (Payment) in the following regression model:

Earningst-1 = β0 + β1*Dt-1 + β2*Rett-1 + β3*Rett-1* Dt-1

+ β4*Paymentt +β5*Paymentt *Dt-1+β6* Paymentt *Rett-1 + β7 *Paymentt * Rett-1* Dt

+εt Eq. (2)

We use the baseline Basu (1997) model in Eq. (1) by including the choice of payment method for the deal (Payment) along with additional firm-level controls in the following regression model:



+β8* MTBt-1 +β9* MTBt-1 *Dt-1+β10* MTBt-1 *Rett-1+β11* MTBt-1 *Rett-1* Dt-1

+β12* Market Leveraget-1+β13* Market Leveraget-1*Dt-1 +β14* Market Leveraget-1*Rett-1+β15 * Market Leveraget-1* Rett-1* Dt-1

+β16* Firm sizet-1 +β17* Firm sizet-1 *Dt-1 +β18* Firm sizet-1 *Rett-1 + β19* Firm sizet-1 * Rett-1* Dt-1

+β20*Ltigationt-1 +β21 *Ltigationt-1 *Dt-1 +β22*Ltigationt-1 *Rett-1 + β23*Ltigationt-1 * Rett-1* Dt-1 +εt Eq. (3)

We also use the baseline Basu (1997) model in Eq. (1) by including the choice of payment method for the deal (Payment) along with additional firm-level and deal level controls in the following regression model:



+β8* MTBt-1 +β9* MTBt-1 *Dt-1+β10* MTBt-1 *Rett-1+β11* MTBt-1 *Rett-1* Dt-1

+β12* Market Leveraget-1+β13* Market Leveraget-1*Dt-1 +β14* Market Leveraget-1*Rett-1+β15 * Market Leveraget-1* Rett-1* Dt-1

+β16* Firm sizet-1 +β17* Firm sizet-1 *Dt-1 +β18* Firm sizet-1 *Rett-1 + β19* Firm sizet-1 * Rett-1* Dt-1

+β20*Cross-Industryt-1+β21*Cross-Industryt-1 *Dt-1+β22* Cross-Industryt-1 *Rett-1+β23* Cross-Industryt-1 *Rett-1* Dt-1

+β24*Public Targett-1+β25*Public Targett-1*Dt-1 +β26*Public Targett-1*Rett-1+β27*Public Targett-1* Rett-1* Dt-1

+β28*Private Targett-1+β29* Private Targett-1*Dt-1 +β30*Private Targett-1*Rett-1+β31* Private Targett-1* Rett-1* Dt-1

+β32*Pooling of interest methodt-1+β33*Pooling of interest methodt-1*Dt-1 +β34*Pooling of interest methodt-1*Rett-1+β35*Pooling of interest methodt-1* Rett-1* Dt-1

+β36*Competet-1+β37*Competet-1*Dt-1 +β38*Competet-1*Rett-1+β39* Competet-1*Rett-1*Dt-1

+β40*Relative sizet-1+β41*Relative sizet-1*Dt-1+β42*Relative sizet-1*Rett-1+β43*Relative sizet-1*Rett-1*Dt-1

+β44*Ltigationt-1 +β45 *Ltigationt-1 *Dt-1 +β46*Ltigationt-1 *Rett-1 + β47*Ltigationt-1 * Rett-1* Dt-1 +εt Eq. (4)

Table 8 report the results of Equation 1,2 3 and 4, Following Faccio and Masulis (2005), Harford et al. (2009) and Usyal (2011), POC, Percentage of Cash, is the proportion of cash component in the payment.

Model 1 shows the baseline of regression of Basu (1997), Equation 1, based on 7505 deals observations from 1980 to 2012, one year prior to the announcement of an acquisition. We the coefficient (β3) of Ret*D is positive and significant indicating losses are recognised at a timely basis, showing the baseline regression still works on this smaller sample. Model 2 shows the regression results of the Equation 2 without firm character control variables, Model 3 reports the results of Equation 3 with firm-level control variables, Model 3 reports the results of Equation 3 with firm-level control variables, Model 4 reports the results of Equation 4 with both firm- and deal- level control variables. All models are consistent to our prediction, the coefficient (β7) of RET*D*Percentage of cash is negative and highly significant. The results show that accounting conservatism make firms less likely to pay for the deal with cash. In Model 2,3 and 4, we also follow Francis and Martin (2010), Ahmed and Duellman (2013) and Kravet (2014) to tests we perform a joint test of the sum of the coefficients Percentage of casht *Rett-1 and Percentage of casht * Rett-1* Dt-1 , that is, (β6* + β7 =0), since the coefficient of Percentage of casht * Rett-1* Dt- 1 by itself does not indicate whether or not the loss recognition is less timely for acquirer firms choosing lower cash component payment method to other acquirer firms. We find that this sum is also significantly negative. Table 8 shows the similar results when we use firm-specific accounting conservatism measures.

To further prove the results of Table 8, in Table 9 and 10, we use All-cash dummy and All-stock dummy to represent method of payment respectively. Table 9 and 10 report the result of the relation between accounting conservatism and mergers and acquisitions payment method

The results in Table 9 and 10 shows a significant and negative (positive) relation between the accounting conservatism and the percentage of cash component in the payment as well as the probability of all cash (stock) payment. The results are not affected when adding firm and deal characteristics.

Other measurements of accounting conservatism include, such as C score, Skenwness of profit and operation cash flows, and Market to Book ratio. C Score measured accounting conservatism, to some extent, conflict to those using accruals and/or measured accounting conservatism. C score is calculated based on a linear function which contains firm’s capital structure, market to book ratio and firm size, all of which are important determinants of merger and acquisition payment choice and used in all merger and acquisition studies within my knowledge. Therefore, the results of using C score as the proxy of accounting conservatism are relatively noisy. Skenwness of profit and operation cash flows is not the appropriate measure in this paper, since profit and cash flow are closely relates to merger and acquisition payment. Market to book ratio is included in all models in this paper, it is used as a firm characteristic, a control variable, measuring market misevaluation and growth opportunities rather than accounting conservatism.

4. Summary and conclusion.

This paper exams whether or not accounting conservatism determine the choice of merger and acquisition payment method using a large sample of deals made from 1980 to 2012. By using 3-year-accumulated non-operational accruals, accumulated non-operational accruals and 5-year-average non-operational accruals as the main measurement of accounting conservatism, we find that the likelihood of mergers and acquisitions that are paid with all-cash is negatively related to the conservativeness of acquirer firms’ financial reporting, and the fraction of acquisitions paid with cash versus stock is also negatively related accounting conservatism. These findings support the previous research that firms with conservative financial statements are likely to use equity to finance their investment projects. We following the similar method as Francis and Martin (2010) and Kravet (2014) to use Basu’s (1997) asymmetric timeliness of earnings model to estimate the relation between accounting conservatism and merger and acquisition payment method choice, and find firms with higher conservative financial reports are less likely to use all cash payment or payment with higher cash component to pay for the deal, similar to the results using firm specific accounting conservatism measures.

This study makes several contributions. First, this study contributes to accounting conservatism literature. This study goes beyond the previous research and explores how the conservatism accounting principle influences on firms’ financing choice when they confront acquisitions, the largest corporate investment projects. On the other hand, our study goes beyond Francis and Martin (2010) and Kravet (2014), it focuses on the association of accounting conservatism and good merger and acquisition outcomes and risks, however, this study focuses on the association of accounting conservatism and acquisition financing decisions.

On the other hand, this study contributes to the corporate finance literature on the interrelation between financing and investment. This study explains that conservative accounting policy is an important factor that constrains firms’ debt financing ability and affects firms’ financing decision for investments.

Finally, this study contributes to the merger and acquisition literature, this study indicates that accounting conservatism leads to the relatively weak financial position so that it reduces firms’ ability to access debt capital, leading to less likelihood of all cash payment and/or lower cash component in the deal payment.

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Appendix: Definition of Variables

3-year-accumulated non-operational accruals, the negative of the ratio of nonoperating accruals to total assets cumulated over the previous three years.

5-year-average non-operational accrual, the negative of the ratio of nonoperating accruals to total assets averaged over the previous three years.

Accumulated nonoperating accruals are multiplied by negative one so that the value of the conservatism proxy increases with a firm’s level of conservatism.

Book Debt is TA minus BE.

Book Equity (BE) is defined as TA minus liabilities (Item 181) plus balance sheet deferred taxes and investment tax credit (Item35) minus PS.

Book Leverage Deficit is actual leverage minus predicted target debt ratio.

Book Leverage is Book Debt over TA..

CAR is the cumulative abnormal returns (in percentage) which are calculated over a three day event window (two days before and two days after the announcement date). The benchmark returns are the value-weighted index of returns including dividends for the combined New York Stock Exchange, American Stock Exchange and NASDAQ.

Combo takes value of one if deal is financed by both stock and cash.

Competed takes value of one if there are more than one offers for the target.

EBITDA/TA is EBITDA (Item13) over lagged TA.

Hostile takes value of 1 if the management describes the deal as unfriendly.

Industry M&A Liquidity is the ratio of value of total transaction value of within industry acquisitions for each year and Fama-French industry to the total value of assets of all COMPUSTAT firms in the same year and Fama-French industry (1997).Focus takes value of one if target and acquirer are categorized in the same Fama-French industry grouping.

Market Equity (ME) is common shares outstanding (Item 25) times the stock price (Item

Market Leverage is Book Debt over MV.

Market Value (MV) is defined as liabilities (Item181) minus balance sheet deferred taxes and investment tax credit (Item35) plus PS plus ME.

Market-to-Book ratio is defined as MV over TA.

Nonoperating accruals are defined as net income (Item172) plus depreciation (Item14) minus cash flow from operations (Item308) minus change in accounts receivable (Item2) minus change in inventories (Item3) minus change in prepaid expenses (Item160) plus change in accounts payable (Item70) plus change in tax payable (Item71). Cash flow from operations (Item308) If Item308 is missing, we estimate cash flow from operations as funds from operations (Item110) minus change in current assets (Item4) minus change in short term debt (Item34) plus change in current liabilities (Item5) plus change in cash (Item1).

Preferred Stock (PS) is equal to liquidating value (Item 10) if available, else redemption value (Item 56) if available, else carrying value (Item 130).

Private takes value of one if target is a private firm.

Public takes value of one if target is a public firm.

R&D Dummy takes the value of one if COMPUSTAT reports R&D expense as missing.

R&D/ TA is defined as R&D expenses (Item 46) over TA.

Relative Size is the ratio of transaction value to the market value of acquirer.

RET is the buy and hold return of firm over the period beginning four months after the beginning of its fiscal year. D is a dummy variable equal to 1 when RET is negative, and 0 otherwise.

Sales is the natural logarithm of sales (Item 12) in 1987 dollars.

Skewness, is the difference between the skewness in cash flows (Item 308/ Item 6) and earnings (Item 172/ Item 6). We measure skewness using a maximum of 20 quarters and a minimum of 5 quarters of Item prior to entering into the contract.

Stock is a dummy variable for all-stock deals.

Tangible Assets/ TA is net property, plant and equipment (Item 8) over TA.

Tender is a dummy for tender offers.

Total accrual is net income (Item172) plus depreciation (Item14) minus cash flow from operations (Item308), If Item308 is missing, we estimate cash flow from operations as funds from operations (Item110) minus change in current assets (Item4) minus change in short term debt (Item34) plus change in current liabilities (Item5) plus change in cash (Item1).

Tables

Table 1 Distribution of acquisitions sample by announcement year

Year

N

Cash Payment

Stock Payment

Mix Payment

N

Percentage

N

Percentage

N

Percentage

1980

5

4

80%

1

20%

0

0%

1981

8

6

75%

2

25%

0

0%

1982

1

1

100%

0

0%

0

0%

1983

1

1

100%

0

0%

0

0%

1984

11

7

64%

4

36%

0

0%

1985

110

73

66%

30

27%

7

6%

1986

103

67

65%

30

29%

6

6%

1987

110

60

55%

39

35%

11

10%

1988

114

77

68%

26

23%

11

10%

1989

123

67

54%

45

37%

11

9%

1990

124

74

60%

39

31%

11

9%

1991

111

54

49%

38

34%

19

17%

1992

162

64

40%

77

48%

21

13%

1993

270

128

47%

113

42%

29

11%

1994

288

116

40%

136

47%

36

13%

1995

372

138

37%

195

52%

39

10%

1996

463

161

35%

241

52%

61

13%

1997

452

177

39%

194

43%

81

18%

1998

542

244

45%

202

37%

96

18%

1999

460

182

40%

203

44%

75

16%

2000

376

143

38%

181

48%

52

14%

2001

286

150

52%

94

33%

42

15%

2002

306

196

64%

60

20%

50

16%

2003

294

177

60%

61

21%

56

19%

2004

372

260

70%

42

11%

70

19%

2005

367

246

67%

35

10%

86

23%

2006

352

266

76%

36

10%

50

14%

2007

332

246

74%

26

8%

60

18%

2008

210

150

71%

21

10%

39

19%

2009

173

113

65%

29

17%

31

18%

2010

233

182

78%

20

9%

31

13%

2011

203

158

78%

11

5%

34

17%

2012

171

143

84%

8

5%

27

16%

Total

7505

4131

55%

2239

30%

1142

15%

Table 2 The descriptive statics of the sample. All firm characteristic variables are measured one fiscal year prior to the deal announcement. All variables definitions are on the appendix.

Variables

N

MEAN

STD

MIN

MAX

3-year-accumulated non-operational accruals

7505

0.115

0.270

-0.543

1.789

Accumulated non-operational accruals

7505

0.028

0.059

-0.106

0.340

5-year-average non-operational accrual

7505

0.043

0.097

-0.172

0.653

Book Leverage

7505

0.209

0.192

0.000

0.551

Market Leverage

7505

0.177

0.188

0.000

0.642

Log Sales

7505

5.648

2.014

1.256

7.972

Market to Book Ratio

7505

2.145

1.355

1.120

5.145

ProfitabiLitigationy

7505

0.160

0.152

-0.115

0.259

Relative size

7505

0.288

1.159

0.010

28.864

Percentage of cash in the payment

7505

0.612

0.458

0.000

1.000

Table 3 The summary statistics of the acquirer sample classified by payment methods. All firm characteristic variables are measured one fiscal year prior to the deal announcement. All variables definitions are in the appendix

Cash Payment

Stock payment

Mix Payment

N

Median

Mean

N

Median

Mean

N

Median

Mean


4131

0.056

0.092

2239

0.069

0.141

1142

0.068

0.144


4131

0.011

0.021

2239

0.013

0.037

1142

0.014

0.034


4131

0.021

0.037

2239

0.028

0.051

1142

0.025

0.055

Market Leverage

4131

0.144

0.194

2239

0.075

0.150

1142

0.103

0.166

Log Sales

4131

6.248

6.169

2239

5.143

5.006

1142

4.935

5.042

Market to Book Ratio

4131

1.574

1.866

2239

1.969

2.658

1142

1.654

2.132

Relative Size

4131

0.074

0.193

2239

0.120

0.341

1142

0.141

0.326

Profitability

4131

0.133

0.127

2239

0.112

0.062

1142

0.106

0.079

Target is a Public firm

4131

0.000

0.188

2239

0.000

0.384

1142

0.000

0.210

Target is a Private firm

4131

0.000

0.430

2239

0.000

0.096

1142

0.000

0.225

Cross-industry M &A

4131

0.000

0.383

2239

1.000

0.519

1142

1.000

0.565

Hostile

4131

0.000

0.437

2239

0.000

0.419

1142

0.000

0.394

Pooling of interest method

4131

0.000

0.009

2239

0.000

0.003

1142

0.000

0.004

Compete

4131

0.000

0.000

2239

0.000

0.347

1142

0.000

0.006

Target is a Public Target firm

4131

0.000

0.023

2239

0.000

0.011

1142

0.000

0.021

Table 4 reports the relation between accounting conservatism and merger and acquisition payment based tobit regressions, the dependent variable is the proportion of cash in the payment. Model 1, accounting conservatism is measured by 3-year-accumulated non-operational accruals; Model 2, accounting conservatism is measured by accumulated non-operational accrual; and Model 3, accounting conservatism is measured by 5-year-average non-operational accruals. All variables definitions are in the appendix.

Variables

Model 1

Model 2

Model 3

Coef.

P value

Coef.

P value

Coef.

P value


-0.333

(0.002)


-1.430

(0.001)


-0.676

(0.039)

Market Leverage

0.231

(0.000)

0.231

(0.000)

0.181

(0.002)

Stock return

-0.122

(0.003)

-0.113

(0.007)

-0.109

(0.018)

Market to book ratio

-0.071

(0.000)

-0.072

(0.000)

-0.075

(0.000)

Profitability

2.472

(0.000)

2.506

(0.000)

2.567

(0.000)

Firm size

0.165

(0.000)

0.163

(0.000)

0.175

(0.000)

Public target firm

-1.666

(0.000)

-1.681

(0.000)

-1.694

(0.000)

Private target firm

-1.025

(0.000)

-1.049

(0.000)

-1.043

(0.000)

Pooling of interest

-4.498

(0.000)

-4.537

(0.000)

-4.582

(0.000)

Compete

1.366

(0.000)

1.394

(0.000)

1.455

(0.000)

Cross Industry

-0.019

(0.734)

-0.026

(0.644)

-0.057

(0.359)

Relative size

-0.204

(0.001)

-0.209

(0.001)

-0.200

(0.004)

Industry mergers and acquisitions activity

-1.931

(0.117)

-1.829

(0.136)

-1.754

(0.183)

Herfindahl index

0.031

(0.910)

-0.008

(0.974)

-0.111

(0.708)

Year fixed effect

Yes

Yes

Yes

Industry fixed effect

Yes

Yes

Yes

Observations

7505

7505

7505

Pseudo R2

0.291

0.290

0.284

Table 5 reports the relation between accounting conservatism and merger and acquisition payment based probit regressions, the dependent variable equals to 1 if the deals are paid by cash only. Model 1, accounting conservatism is measured by 3-year-accumulated non-operational accruals; Model 2, accounting conservatism is measured by accumulated non-operational accrual; and Model 3, accounting conservatism is measured by 5-year-average non-operational accruals. All variables definitions are in the appendix.

Variables

Model 1

Model 2

Model 3

Coef.

P value

Coef.

P value

Coef.

P value


-0.273

(0.001)


-1.068

(0.005)


-0.525

(0.032)

Market Leverage

0.180

(0.000)

0.179

(0.000)

0.145

(0.000)

Stock return

-0.119

(0.000)

-0.113

(0.000)

-0.101

(0.003)


-0.048

(0.000)

-0.049

(0.000)

-0.053

(0.000)

Profitability

1.968

(0.000)

2.002

(0.000)

1.975

(0.000)

Firm size

0.133

(0.000)

0.130

(0.000)

0.138

(0.000)

Public target firm

-1.050

(0.000)

-1.056

(0.000)

-1.047

(0.000)

Private target firm

-0.701

(0.000)

-0.711

(0.000)

-0.693

(0.000)

Pooling of interest

-3.036

(0.000)

-3.035

(0.000)

-3.041

(0.000)

Compete

0.857

(0.000)

0.882

(0.000)

0.875

(0.000)

Cross Industry

-0.025

(0.543)

-0.026

(0.531)

-0.046

(0.291)

Relative size

-0.146

(0.008)

-0.151

(0.004)

-0.141

(0.018)


-1.908

(0.040)

-1.808

(0.049)

-1.654

(0.085)

Herfindahl index

0.037

(0.850)

0.012

(0.951)

-0.015

(0.944)

Year fixed effect

Yes

Yes

Yes


Yes

Yes

Yes

Observations

7505

7505

7505

Pseudo R2

0.315

0.314

0.308

Table 6 reports the relation between accounting conservatism and merger and acquisition payment based probit regressions, the dependent variable equals to 1 if the deals are paid by stock only. Model 1, accounting conservatism is measured by 3-year-accumulated non-operational accruals; Model 2, accounting conservatism is measured by accumulated non-operational accrual; and Model 3, accounting conservatism is measured by 5-year-average non-operational accruals. All variables definitions are in the appendix.

Variables

Model 1

Model 2

Model 3

Coef.

P value

Coef.

P value

Coef.

P value


0.166

(0.057)


0.942

(0.007)


0.307

(0.263)

Market Leverage

-0.083

(0.055)

-0.083

(0.047)

-0.046

(0.273)

Stock return

0.035

(0.304)

0.029

(0.396)

0.027

(0.466)


0.047

(0.000)

0.047

(0.000)

0.047

(0.000)

Profitability

-1.519

(0.000)

-1.501

(0.000)

-1.591

(0.000)

Firm size

-0.073

(0.000)

-0.073

(0.000)

-0.075

(0.000)

Public target firm

1.161

(0.000)

1.157

(0.000)

1.151

(0.000)

Private target firm

0.660

(0.000)

0.668

(0.000)

0.649

(0.000)

Pooling of interest

2.929

(0.000)

2.946

(0.000)

2.909

(0.000)

Compete

-0.975

(0.000)

-0.979

(0.000)

-1.061

(0.000)

Cross Industry

0.041

(0.357)

0.052

(0.242)

0.067

(0.158)

Relative size

0.113

(0.001)

0.116

(0.001)

0.104

(0.006)


0.498

(0.594)

0.479

(0.603)

0.288

(0.771)

Herfindahl index

0.052

(0.811)

0.075

(0.720)

0.181

(0.425)

Year fixed effect

Yes

Yes

Yes


Yes

Yes

Yes

Observations

7505

7505

7505

Pseudo R2

0.406

0.404

0.400

Table 7 reports the relation between accounting conservatism and merger and acquisition payment using purchase method only based tobit regressions, the dependent variable is the proportion of cash in the payment. Model 1, accounting conservatism is measured by 3-year-accumulated non-operational accruals; Model 2, accounting conservatism is measured by accumulated non-operational accrual; and Model 3, accounting conservatism is measured by 5-year-average non-operational accruals. All variables definitions are in the appendix.

Variables

Model 1

Model 2

Model 3

Coef.

P value

Coef.

P value

Coef.

P value


-0.334

(0.002)


-1.386

(0.002)


-0.656

(0.045)

Market Leverage

0.228

(0.000)

0.228

(0.000)

0.177

(0.003)

Stock return

-0.134

(0.001)

-0.125

(0.003)

-0.123

(0.007)


-0.071

(0.000)

-0.072

(0.000)

-0.075

(0.000)

Profitability

2.483

(0.000)

2.521

(0.000)

2.585

(0.000)

Firm size

0.165

(0.000)

0.164

(0.000)

0.175

(0.000)

Public target firm

-1.677

(0.000)

-1.692

(0.000)

-1.705

(0.000)

Private target firm

-1.027

(0.000)

-1.052

(0.000)

-1.046

(0.000)

Compete

1.384

(0.000)

1.412

(0.000)

1.479

(0.000)

Cross Industry

-0.025

(0.668)

-0.031

(0.587)

-0.063

(0.313)

Relative size

-0.207

(0.001)

-0.212

(0.001)

-0.203

(0.004)


-2.076

(0.093)

-1.971

(0.110)

-1.931

(0.144)

Herfindahl index

0.03

(0.911)

-0.008

(0.975)

-0.112

(0.706)

Year fixed effect

Yes

Yes

Yes


Yes

Yes

Yes

Observations

5977

5977

5977

Pseudo R2

0.169

0.170

0.165

Table 8 shows the results of the relation between accounting conservatism and merger and acquisition payment choice. The payment variable is the percentage of cash component in the payment. Model 1 is an OLS regression without considering merger and acquisition variables and other firm and deal characteristics; Model 2 an OLS regression considering merger and acquisition payment only without other firm and deal characteristics; Model 3 is an OLS regression considering merger and acquisition payment and other firm characteristics; Model 4 is an OLS regression considering merger and acquisition payment and other firm and deal characteristics; All variables definitions are in the appendix

Variables

Model 1

Model 2

Model 3

Model 4

Coef.

P value

Coef.

P value

Coef.

P value

Coef.

P value

RET

-0.015

(0.000)

-0.005

(0.094)

-0.008

(0.351)

-0.001

(0.958)

D

0.051

(0.000)

0.054

(0.010)

0.082

(0.056)

0.121

(0.018)

RET*D

0.495

(0.000)

0.571

(0.000)

0.875

(0.000)

1.059

(0.000)

RET*Percentage of cash

0.001

(0.712)

0.001

(0.809)

0.001

(0.832)

D* Percentage of cash

-0.026

(0.282)

-0.045

(0.039)

-0.043

(0.129)

RET*D* Percentage of cash

-0.259

(0.017)

-0.298

(0.002)

-0.320

(0.009)

Percentage of cash

0.038

(0.000)

0.032

(0.000)

0.042

(0.000)

RET*Market to Book ratio

0.000

(0.207)

0.001

(0.171)

D*Market to Book ratio

-0.003

(0.171)

-0.003

(0.313)

RET*D*Market to Book ratio

-0.017

(0.053)

-0.014

(0.117)

Market to Book ratio

-0.003

(0.000)

-0.003

(0.000)

RET*Market leverage

0.013

(0.204)

0.015

(0.183)

D*Market leverage

0.019

(0.510)

0.019

(0.528)

RET*D*Market leverage

0.187

(0.024)

0.178

(0.028)

Market leverage

-0.022

(0.077)

-0.022

(0.117)

RET*Firm size

0.001

(0.563)

0.000

(0.765)

D*Firm size

-0.007

(0.252)

-0.013

(0.044)

RET*D*Firm size

-0.089

(0.001)

-0.117

(0.000)

Firm size

0.012

(0.000)

0.013

(0.000)

RET*Cross-Industry

0.001

(0.681)

D*Cross-Industry

-0.058

(0.000)

RET*D*Cross-Industry

-0.281

(0.000)

Cross-Industry

-0.001

(0.835)

RET*Public Target

0.001

(0.882)

D*Public Target

0.012

(0.663)

RET*D*Public Target

0.045

(0.730)

Public Target

0.007

(0.176)

RET*Private Target

-0.006

(0.211)

D*Private Target

-0.001

(0.960)

RET*D*Private Target

0.049

(0.560)

Private Target

0.012

(0.037)

RET*Pooling of interest method

0.009

(0.052)

D*Pooling of interest method

-0.008

(0.791)

RET*D*Pooling of interest method

-0.261

(0.019)


0.008

(0.319)

RET*Compete

-0.001

(0.948)

D*Compete

0.138

(0.109)

RET*D*Compete

0.812

(0.146)

Compete

-0.006

(0.572)

RET*Relative size

-0.005

(0.334)

D*Relative size

0.015

(0.634)

RET*D*Relative size

0.105

(0.416)

Relative size

0.001

(0.891)

RET*Litigation

0.003

(0.536)

0.005

(0.335)

D*Litigation

0.049

(0.005)

0.050

(0.007)

RET*D*Litigation

0.277

(0.001)

0.202

(0.015)

Litigation

-0.083

(0.061)

-0.100

(0.021)

β6+ β7 =0

-0.257

(0.017)

-0.296

(0.002)

-0.318

(0.009)

Year fixed effect

No

Yes

Yes

Yes


No

Yes

Yes

Yes

Observations

7505

7505

7505

7505

R2

0.132

0.190

0.291

0.340

Table 9 shows the results of the relation between accounting conservatism and merger and acquisition payment choice using Basu’s (1997) asymmetric timeliness of earnings. The payment variable equals to 1 if the payment method is cash only and 0 otherwise. Model 1 is an OLS regression considering merger and acquisition payment and other firm characteristics; Model 2 is an OLS regression considering merger and acquisition payment and other firm and deal characteristics; All variables definitions are in the appendix

Variables

Model 1

Model 2

Coef.

P value

Coef.

P value

RET

-0.009

(0.271)

-0.003

(0.802)

D

0.075

(0.071)

0.108

(0.027)

RET*D

0.850

(0.000)

1.031

(0.000)

RET*All-cash dummy

0.004

(0.232)

0.005

(0.227)

D* All-cash dummy

-0.036

(0.059)

-0.030

(0.170)

RET*D* All-cash dummy

-0.309

(0.000)

-0.325

(0.001)

All-cash dummy

0.022

(0.000)

0.024

(0.000)


0.001

(0.156)

0.001

(0.155)


-0.003

(0.198)

-0.002

(0.350)


-0.017

(0.053)

-0.013

(0.123)


-0.003

(0.000)

-0.004

(0.000)

RET*Market leverage

0.013

(0.190)

0.015

(0.168)

D*Market leverage

0.017

(0.546)

0.017

(0.569)


0.185

(0.024)

0.177

(0.028)

Market leverage

-0.022

(0.086)

-0.021

(0.134)

RET*Firm size

0.001

(0.627)

-0.001

(0.741)

D*Firm size

-0.007

(0.236)

-0.013

(0.037)

RET*D*Firm size

-0.088

(0.001)

-0.117

(0.000)

Firm size

0.011

(0.000)

0.013

(0.000)

RET*Cross-Industry

0.002

(0.543)

D*Cross-Industry

-0.057

(0.000)


-0.279

(0.000)

Cross-Industry

-0.002

(0.724)

RET*Public Target

0.000

(0.931)

D*Public Target

0.014

(0.569)

RET*D*Public Target

0.048

(0.674)

Public Target

0.004

(0.486)

RET*Private Target

-0.005

(0.213)

D*Private Target

0.003

(0.883)


0.051

(0.563)

Private Target

0.010

(0.087)


0.012

(0.007)


0.002

(0.942)


-0.237

(0.016)


-0.005

(0.510)

RET*Compete

-0.003

(0.793)

D*Compete

0.129

(0.146)

RET*D*Compete

0.766

(0.186)

Compete

-0.002

(0.857)

RET*Relative size

-0.005

(0.319)

D*Relative size

0.017

(0.598)

RET*D*Relative size

0.108

(0.409)

Relative size

0.001

(0.915)

RET*Litigation

0.003

(0.523)

0.005

(0.297)

D*Litigation

0.047

(0.008)

0.049

(0.011)

RET*D*Litigation

0.278

(0.002)

0.203

(0.018)

Litigation

-0.078

(0.078)

-0.094

(0.032)

β6+ β7 =0

-0.305

(0.000)

-0.320

(0.001)

Year fixed effect

Yes

Yes


Yes

Yes

Observations

7505

7505

R2

0.293

0.340

Table 10 shows the results of the relation between accounting conservatism and merger and acquisition payment choice using Basu’s (1997) asymmetric timeliness of earnings. The payment variable equals to 1 if the payment method is stock only and 0 otherwise. Model 1 is an OLS regression considering merger and acquisition payment and other firm characteristics; Model 2 is an OLS regression considering merger and acquisition payment and other firm and deal characteristics; All variables definitions are in the appendix

Variables

Model 1

Model 2

Coef.

P value

Coef.

P value

RET

-0.011

(0.198)

-0.001

(0.955)

D

0.042

(0.287)

0.080

(0.076)

RET*D

0.649

(0.000)

0.796

(0.000)

RET*All-stock dummy

0.004

(0.393)

0.003

(0.565)

D* All-stock dummy

0.045

(0.052)

0.045

(0.141)

RET*D* All-stock dummy

0.231

(0.014)

0.247

(0.046)

All-stock dummy

-0.030

(0.000)

-0.037

(0.000)


0.000

(0.262)

0.001

(0.203)


-0.004

(0.142)

-0.003

(0.278)


-0.017

(0.056)

-0.013

(0.125)


-0.003

(0.000)

-0.004

(0.000)

RET*Market leverage

0.015

(0.129)

0.017

(0.123)

D*Market leverage

0.021

(0.485)

0.020

(0.505)


0.183

(0.029)

0.174

(0.033)

Market leverage

-0.023

(0.073)

-0.021

(0.122)

RET*Firm size

0.001

(0.551)

-0.001

(0.730)

D*Firm size

-0.007

(0.260)

-0.012

(0.054)

RET*D*Firm size

-0.090

(0.000)

-0.118

(0.000)

Firm size

0.012

(0.000)

0.013

(0.000)

RET*Cross-Industry

0.001

(0.775)

D*Cross-Industry

-0.061

(0.000)


-0.293

(0.000)

Cross-Industry

-0.001

(0.864)

RET*Public Target

0.000

(0.949)

D*Public Target

0.016

(0.548)

RET*D*Public Target

0.094

(0.470)

Public Target

0.004

(0.490)

RET*Private Target

-0.007

(0.091)

D*Private Target

0.001

(0.941)


0.077

(0.359)

Private Target

0.009

(0.096)


0.009

(0.075)


-0.016

(0.612)


-0.278

(0.023)


0.008

(0.342)

RET*Compete

0.001

(0.965)

D*Compete

0.137

(0.100)

RET*D*Compete

0.821

(0.126)

Compete

-0.003

(0.811)

RET*Relative size

-0.006

(0.267)

D*Relative size

0.015

(0.630)

RET*D*Relative size

0.106

(0.406)

Relative size

0.000

(0.999)

RET*Litigation

0.004

(0.368)

0.006

(0.230)

D*Litigation

0.049

(0.006)

0.049

(0.009)

RET*D*Litigation

0.258

(0.003)

0.178

(0.034)

Litigation

-0.084

(0.060)

-0.100

(0.023)

β6+ β7 =0

0.235

(0.012)

0.250

(0.043)

Year fixed effect

Yes

Yes


Yes

Yes

Observations

7505

7505

R2

0.284

0.333

28

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