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ABSTRACT
Using a sample of M&As from 19 countries, we identify the effects of mandatory IFRS adoption on M&As by analyzing changes in frequency and in market-perceived benefits for mandatory IFRS adopters (from treatment countries) against non-IFRS adopters (from control countries). Using difference-in-differences analyses, we find (1) frequency with which a treatment firm acquires a foreign (local) firm increases (decreases) in the post-IFRS adoption period; (2) acquirers’ M&A synergies increase for cross-border M&As in treatment countries between public acquirers and public targets; and (3) acquirers’ synergies decrease for within-country M&As in treatment countries between public acquirers and private targets.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1. We examine the effects of IFRS adoption on targets’ synergies and on the total synergies of value-weighted portfolios of acquirers and targets in additional tests.
2. M&A transactions in which the acquirers are private companies are not included in our sample because private acquirers’ merger synergies cannot be estimated.
3. Because we expect that there is no change in comparability in the post-IFRS adoption period for within-country public-public M&As, we address this issue in an additional test.
4. A Deloitte (Citation2013) survey of directors and chief financial officers from companies with revenues of USD500 million or above found that the greatest cause for concern in M&As was integration failure and that accounting system integration was a key factor in a successful M&A.
5. Louis and Urcan (Citation2014) look at a sample of countries and find that very few private firms voluntarily adopt IFRS.
6. We exclude 2006 from the sample because the acquirers involved in the M&As announced in that year likely used both IFRS-based information and information based on local accounting standards to evaluate target firms. The conclusions are unaffected by including this year (untabulated).
7. We also measure M&A synergy as the abnormal return in a 3-day window (days −1 to +1) around the initial M&A announcement day (day 0) and repeat the main test. The signs of all coefficients are the same as those based on the 11-day window. Although there are differences in the significance levels of the coefficients, the conclusions are unchanged.
8. For example, one valuation approach commonly used by acquirers is to compare valuation metrics such as the P/E ratio, earnings per share, and profit margin of a potential target with those of the target’s peer firms to determine the ‘right’ acquisition price (e.g. Clayman, Fridson, and Troughton Citation2012).
9. We use the term ‘acquirer’ instead of ‘acquirer and/or its advisor’ for simplicity. We acknowledge that advisors (e.g. investment banks) are often involved in the due diligence process. However, they, like acquirers, rely on financial statements as their main source of information (Bruner Citation2004; Lajoux and Elson Citation2010).
10. If an M&A involves a private target or a private target initiates the acquisition, then the target may provide private information to the acquirer from the very beginning of the due diligence process.
11. For example, IFRS require firms to recognize the cost of providing employee benefits in the period when benefits are earned, instead of when they are paid, as is done in most local accounting standards in Europe. They also require firms to recognize all derivatives at their fair value in statements of financial position, whereas derivatives are either off the balance sheet or recognized at cost in the local accounting standards of most European countries.
12. We follow the IFRS literature (e.g. Ahmed et al., Citation2013; Daske et al. Citation2008) and the international M&A literature (e.g. Alexandridis, Petmezas, and Travlos Citation2010; Erel, Liao, and Weisbach Citation2012; Rossi and Volpin Citation2004) to select the sample countries for our study. For the treatment countries, we select the 14 countries from the European Union that mandated IFRS in 2005 and have enough within-country and cross-country M&A transactions for our analysis. For the five control countries, we select the non-IFRS adopters that have enough within-country and cross-country M&A transactions for our analysis.
13. Finland and Luxembourg are not included in the sample due to missing values of required data.
14. Public firms in Canada adopted IFRS for financial years beginning on or after 1 January 2011. The M&A sample for Canada includes M&A transactions announced before 31 December 2012.
15. The Thomson Financial SDC Platinum database includes M&As for subsidiaries, joint ventures, and government-owned firms.
16. Within-country M&As = (27,869 + 48,323)/91,268 = 83%; cross-country M&As = (2,432 + 12,644)/91,268 = 17%.
17. Public-private M&As = (12,644 + 48,323)/91,268 = 67%; public-public M&As = (2,432 + 27,869)/91,268 = 33%.
18. The market indices for Austria, Belgium, Canada, Denmark, France, Germany, Greece, Ireland, Italy, Japan, Malaysia, the Netherlands, Norway, Portugal, Russia, Spain, Sweden, the U.K., and the U.S. are the ATX, BFX, GSPTSE, OMXC, FCHI, DAX, Athex, ISEQ, MIB, N225, KLSE, AEX, OBX, PSI, MCX, IBEX, OMXS, FTSE, and SPX, respectively.
19. We thank an anonymous reviewer for this comment.
20. Moeller, Schlingemann, and Stulz (Citation2003) find that an acquirer’s M&A announcement return is higher for small acquirers irrespective of the form of financing and the firm’s listing status.
21. A merger of equals indicates that the target and acquirer in a stock-swap transaction have approximately the same market capitalization and that the ownership of the new entity is a 50/50 ownership split between the target and acquirer shareholders. Both companies should also have close to equal representation on the board of the new company. We collect these data from the SDC database.
22. Public firms use the same standards in the pre-IFRS (local GAAPs) and post-IFRS (IFRS) periods.
23. With a more efficient due diligence process, acquirers should become more capable in choosing better targets after IFRS adoptions. Typical performance metrics (such as P/E ratios and EBITDA multiples) may not be able to capture such target value as perceived by acquirers because acquirers tend to target undervalued firms or firms with potential value such as innovative firms (e.g. Andrei and Vishny Citation2003; Maksimovic, Phillips, and Yang Citation2013; Phillips and Zhdanov Citation2013). The ideal measure of the target value would be the value as perceived by acquirers upon the completion of the due diligence process. Unfortunately, such a value is difficult to observe. As a result, we are not able to explicitly examine whether the targets chosen by acquirers are better in quality than their peer firms after IFRS adoption. We are grateful for an anonymous reviewer’s suggestion to measure the long-term performance of the merged firms, which we believe appropriately measures the value of the targets from the perspective of the acquirers and allows us to analyze whether the quality of target firm is higher after IFRS adoption.
24. We also use two years of pre- and post-M&A data and repeat the tests. The conclusion is unchanged.
25. We thank an anonymous reviewer for this comment on the limitation of this study and the implied further research opportunity.