Does risk disclosure influence mergers and acquisitions? A textual analysis

ABSTRACT

Using textual analysis and the data of China’s A-share listed companies from 2010 to 2020, this study examines how risk disclosure in annual reports influences subsequent mergers and acquisitions (M&A). The empirical results show that the risk disclosure tone of annual reports is positively associated with the probability of engaging in M&A deals and bid premium, but is negatively associated with long-term stock returns. Furthermore, the level of risk disclosure in annual reports exerts a negative impact on the probability of all-cash bids and bid premium, but positively associated with the long-term M&A performance, indicating that risk disclosure helps alleviate the information asymmetry between acquirers and targets. The empirical evidence highlights the value relevance of risk disclosure content in annual reports, and the importance in strengthening the supervision of qualitative information disclosure.

KEYWORDS:

• Risk disclosure
• annual report
• mergers & acquisitions
• textual analysis

JEL CLASSIFICATION:

• G34
• C88

Acknowledgments

This work was supported by the Department of Science and Technology of Guangdong Province under Grant 2020A1515010413.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ For the construction of the sentiment dictionary, we first translate the positive and negative words of Loughran and McDonald’s word list into Chinese. Then we combine them with HOWNET dictionary and delete some words that repeated or do not fit the Chinese context. After these processing, the sentiment dictionary eventually contains 4650 positive words and 5582 negative words.

Additional information

Funding

This work was supported by the the Department of Science and Technology of Guangdong Province [2020A1515010413].