Informativeness of Internal Control Weakness Disclosure on Acquirers’ M&A Decisions

SYNOPSIS: We empirically examine the relevance of the disclosure of internal control weaknesses (ICWs) by target firms for acquirers in making their merger-and-acquisition (M&A) decisions. We find that acquirers offer lower premiums for targets that disclose ICWs (ICW targets) before acquisition in comparison with targets that disclose effective internal controls (non-ICW targets). We also find that acquirers offer less cash (versus stock) for ICW targets in comparison with non-ICW targets. Overall, results indicate that ICW disclosure by targets is informative to acquirers. Practically, we contribute to the literature by identifying the relevance of ICW disclosure as a reliable public source of information that can help mitigate the negative impact on acquirers acquiring target firms with poor financial reporting quality.