Accounting quality, corporate acquisition, and financing decisions

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.