Accounting Quality, Corporate Acquisition, and Financing Decisions

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Abstract

This paper examines the extent to which the quality of financial accounting information disciplines manager interests to align with stockholder interests in corporate acquisition and financing decisions. I find that, after controlling for financing constraints, recent performance and payout policy, the tendency of firm managers to time the market is significantly constrained for firms with high-quality financial accounting information. Further, I find that the disciplining impact of accounting information is mostly driven by firms that bid for acquisitions financed with stock issuance. I also provide corroborating evidence by examining a similar disciplining role of financial accounting information in the seasoned public offering markets. I find no such effect for potential acquisitions financed through cash. The evidence suggests that high-quality accounting information allows stockholders to discipline firm managers that are motivated to take advantage of the misvaluation. Further, the results suggest the effectiveness of accounting information as a control mechanism is pronounced for firms that pursue more value-decreasing investment projects.

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