The effect of timely loss recognition on the market for corporate control
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This study examines how target firms' accounting conservatism affects corporate mergers and acquisitions (M&A). First, I find that firms are more likely to be taken over by bidders in the M&A market when their financial reporting is more conservative. Second, with respect to the M&A payment method, my evidence reveals that target firms are more likely to be paid with cash rather than stock as their financial reporting is more conservative. In addition, I also find that target firms' conservatism is negatively related with the likelihood of target termination fee and acquirer lock-up provisions. Fourth, the results further indicate that acquirers' three-day abnormal returns at the M&A announcement are higher when targets' accounting is more conservative. Finally, target firms' accounting conservatism accelerates the closing of M&A deals. Overall, my results suggest that target firms' accounting conservatism plays an important role in the market for corporate control.