Does the financial reporting quality of private targets matter for deal timing? Evidence from European M&A

Abstract

We investigate whether the financial reporting quality (FRQ) of privately-held targets influences deal timing dynamics in a sample of 1286 European mergers and acquisitions (M&A) operations announced during the years 2012–2023. Given the weak demand for high-FRQ in the private setting, the usefulness of the financial information of private firms is questionable and capital providers may prefer alternative solutions to reduce information asymmetry problems when valuing these targets. We address this empirical question running multivariate regression analyses to test the association between the deal timing and the private targets’ FRQ, proxied by accrual-based and non-accrual metrics. Our main results, interpreted through the lens of signalling theory, show that the deals are completed faster when private targets exhibit better FRQ. These findings suggest that acquirers rely on the deep analysis of private firms’ financial information to allocate their due diligence resources, supporting the usefulness of FRQ in the private setting. Additionally, we observe that the industry-relatedness nature of transactions shapes the strength of this association, and that in due diligence stage where acquirers can manage only a limited information released by sellers, the targets’ FRQ may become less useful. While the research reveals insights on the role of targets’ financial information in M&A terms, it also suggests that policymakers should consider measures to strengthen reporting practices for private companies to reduce information asymmetry and enhance the efficiency of M&A transactions.