Accounting Conservatism and the Choice of Method of Payment in Corporate Acquisitions

Qingfu Chai1 Dimitrios Vortelinos2 Huainan Zhao3

Abstract

Accounting conservatism refers to a generally accepted accounting principles selection criterion that leads to persistent

understatement of income and assets and/or overstatement of expenses and liabilities over a multi-period of time. Previous

studies find that such persistent overstatement of debt and/or loss by conservative reporting may lead to a ‘weakened’

appearance of a firm’s financial position and/or profitability, thus, accounting conservatism may exacerbate financial

constraints so that it may impede firms accessing debt financing and induce firms’ preference for stock financing . In

planning the merger and acquisition financing, acquirer firms with greater conservative financial reporting would less like to

use debt financing. We use a large sample of 7505 U.S. merger and acquisitions deals from 1980 to 2012. We find a

significantly negative relation between accounting conservatism and the proportion of cash used in the acquisition payment,

and we also find that acquirer firms with greater conservative financial reports would be less likely to choose the all-cash

payment.

Keywords: Accounting conservatism, Acquisitions, Cash

1 Lincoln International Business School, University of Lincoln, UK; Email: tchai@lincoln.ac.uk

2 Corresponding author: Lincoln International Business School, University of Lincoln, UK; Tel.: +44 1522 835634; Email: dvortelinos@lincoln.ac.uk

3 School of Management, Cranfield University, UK; Tel.: +44 1234 754360; Email: Huainan.zhao@cranfield.ac.uk

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1. Introduction

This paper examines whether or not accounting conservatism determines the choice of merger and acquisition payment

method. Previous studies find that the choice of merger and acquisition payment is determined by management, firm,

industry, and macroeconomic levels of non-accounting factors. Study on the relation between merger and acquisition

payment and accounting related topics is limited. The purpose of this study is to fill this gap and address the question on

whether or not accounting conservatism shows effects on their merger and acquisition financing decisions. We empirically

investigate the relation between accounting conservatism and firms’ merger and acquisition payments using a large sample

of 7505 deals announced and completed between 1980 and 2012. With various accounting conservatism measurements, we

find that the likelihood of mergers and acquisitions that are paid entirely in cash is negatively related to the conservativeness

of acquirer firms’ financial reporting, and the fraction of acquisitions paid with cash versus stock is also negatively related to

accounting conservatism. These findings support the previous research that firms with conservative financial statements are

likely to use equity to finance their investment projects (Lee (2011)).

In textbooks, accounting is called ‘the language of business’, therefore, which approach firms’ accounting information is

provided, e.g. aggressive or conservative, should be a factor in determining firms’ investment and financing decisions.

Accounting conservatism has a long history in accounting research, and it refers to a generally accepted accounting

principles selection criterion that leads to persistent understatement of income and assets and/or overstatement of expenses

and liabilities in a long-term. A firm considered as providing conservative financial reporting will continuously make such

accounting choice in the longer-term, not temporarily over one or two years.

In the accounting literature, accounting conservatism reduces the cost of capital and benefits lenders and borrowers in

external debt contracting (e.g. Ahmed and Duellman (2002), Beatty, Weber, Yu (2008), and Zhang (2008)). Accounting

conservatism also reduces the cost of equity (e.g. Kim et al. (2013)). Researchers also find that accounting conservatism

induces firms to use cash efficiently (Louis, Sun, and Urcan (2012)), and firms with conservatism exhibit financial

inflexibility and are likely to issue equity (Lee, 2012). In merger and acquisition literature, cost of capital, financial

flexibility and debt and equity preference are closely related to mergers and acquisitions financing activities (Bharadwaja and

Shivdasani (2003) and Martybivaa and Renneboogb (2009)). Therefore, we expect accounting conservatism would affect

merger and acquisition payment choices.

Building on the two fields of literatures, the persistent overstatement of debt and/or loss by conservative reporting may lead

to a ‘weakened’ appearance of firms’ financial position strength and/or profitability, thus, accounting conservative may

exacerbate financial constraint so that it impedes firms accessing debt financing and induces firms’ preference to issue stock

(Lee, 2012). In the context of choosing the method to finance their mergers and acquisitions, we predict firms with

conservatism are less likely to use all cash or increase the percentage of cash in the payment for the deal.

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To empirically test the prediction, we use a large sample of U.S. 7505 merger and acquisition deals4 from 1980 to 2012. In

order to show this long-term and persistent conservative accounting behaviour, we follow previous studies, such as Beatty,

Weber, Yu (2008), Zhang (2008), Louis, Sun and Urcan (2012) and Kim et al (2013), to use firm-specific accounting

conservatism measures, 3-year-accumulated non-operational accruals; accumulated non-operational accruals and 5-year-

average non-operational accrual are the main measurement of accounting conservatism. Besides, we also follow previous

research, such as Ahmed and Duellman (2002, 2007 and 2013), Francis and Martin (2010), and Kravet (2014), to use Basu’s

(1997) asymmetric timeliness of earnings to measure accounting conservatism.

Consistent to our hypothesis, we find a significantly negative relation between accounting conservatism and the proportion

of cash used in the acquisition payment, and we also find a significantly negative relation between accounting conservatism

and the probability of all cash payment.

This study makes several contributions. First, this study contributes to accounting conservatism literature. Prior well-

documented literatures study how conservatism accounting policy mitigates the bondholder and shareholder conflicts and

reduces the cost of debt, e.g. Ahmed et al. (2002), and how conservatism accounting policy plays a role in firm’s debt

contracting, such as Zhang (2008), Beatty et al. (2008) and Gigler et al. (2009). The relationship between accounting

conservatism and corporate decisions ‘is lacking in the literature’5. This study fills this gap. A related study by Lee (2012)

finds that conservative accounting leads to financial inflexibility and the likelihood of stock financing; however, he does not

consider the interplay between investing and financing. This study goes beyond the previous research and explores how the

conservatism accounting principle influences firms’ financing choice when they confront acquisitions, the largest corporate

investment projects. Other related studies, Francis and Martin (2010), focuses on the association of accounting conservatism

and good merger and acquisition outcomes and Kravet (2014) discusses the relation between accounting conservatism and

merger and acquisition risks. Our study focuses on the association of accounting conservatism and acquisition financing

decisions.

Second, this study also contributes to literature on the effects of accounting on firms’ decisions. Previous studies lack

research on the relationship between financial reporting on corporate decisions (Armstrong et al. (2010)). Studies on

financial reporting and merger and acquisition decisions are rare. Within the range of my literature knowledge, Erickson and

Wang (1999) find that acquiring firms manage earnings upward in the period prior to the stock to stock merger agreement

and they also find that ‘the degree of income increasing earnings management is positively related to the relative size of the

merger’. This study fills the literature gap by using conservative accounting to explain the interdependence between

investment (acquisition) and financing.

Third, this study contributes to the corporate finance literature on the interrelation between financing and investment.

Previous studies find that firms would choose cash as the payment for their acquisitions, when the acquirer firms have excess

free cash flow, (Jensen (1987)), or they are controlled by a major shareholder, (Amihud et al. (1990), Stulz (1988) and Jung,

4 This sample includes firm acquisition, i.e. mergers and acquiring majority of interest of target firms, and assets acquisition, i.e. acquiring certain assets and acquiring a division from the target firms. Financial firms (SIC code 6000-6999) and utility firms (SIC code 4900-4999) are excluded.

5 Cited from Roychowdhury (2010).

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Kim, and Stulz (1996)), or their managers have large stockholdings (Amihud, Lev, and Travlos (1990) and Martin (1996)),

or their managers have information that external investors do not have (Myers and Majluf (1984)), or the acquirer firms are

large (Faccio and Masulis (2005)), or the acquirer firms have at least two bidding competitors (Berkovitch and Narayananor

(1990)), or the acquirer firms have sufficient debt capacity (Martin (1996) and Faccio and Masulis (2005)), or the acquirer

firms are managed by overconfident CEOs (Malmendier and Tate (2008)). On the other hand, acquirers firms would

be likely to choose stock as the payment for their acquisition, when the acquirer firms have growth opportunities (Martin

(1996)), or acquirer firms use the Pooling of Interest accounting method (Robinson and Shane, (1990, or the relative size of

target to bidder is large (Hansen (1987), Martin (1996),and Faccio and Masulis (2005)), or there is market misevaluation

(Shleifer and Vashiny, (2003) or acquirer firms’ industries have high M&A liquidity during the merger wave (Harford

(2005)), or acquirer firms pre-acquisition leverage deviation is high (Hartford, Klasa and Walcott

(2009) and Uysal (2011)). In summary, according to previous studies, the choice of merger and acquisition

payment is determined by management-, firm-, industry-, and macroeconomic- level of factors. However, the relation

between accounting standards and practice and mergers and acquisitions has been drawn less attention. Ours study fills this

gap and explains that conservative accounting policy is an important factor that constrains firms’ debt financing ability and

affects firms’ financing decisions for investments.

Finally, this study contributes to the merger and acquisition literature on firms’ bidding behaviour and the choice of

payment. Previous studies report that bidder firms’ size (Moeller, Schlingemann, and Stulz (2004)), growth opportunities

(Martin (1996)), and leverage (Usyal (2011)) influence the bidding behaviour as well as the payment method of acquisitions.

Besides these factors, this study indicates that accounting conservatism leads to a relatively weak financial position so that it

reduces firms’ ability to access debt capital. Therefore, it impedes firms from using debt (or cash) to pay for the deal.

The paper is organized as follows. Section 2 provides sample selection. Section 3 provides the empirical findings. Section 4

draws conclusions based on the findings.

2. Data and sample construction

The construction of the full sample is from the Security Data Corporation (SDC) database and we match the sample to

Center for Research in Security Prices (CRSP) and Compustat. The procedure of sample selection is detailed in the following

four steps.

First, we require the acquisitions are announced and complete between the beginning of 1980 and the end of 2012. We also

require no missing data in Value of Transaction (SDC: VAL) which is defined as ‘the total value of consideration paid by the

acquiror, excluding fees and expenses’. Following Fuller, Netter and Stegemoller (2002) and Uysal (2011), excluding

financial firms (6000-6999) and utilities firms (4900-4999).

Second, we follow Uysal (2011) to require the relative size of target to bidder is at least 1%. The Relative Size is calculated

as Value of transaction divided by the market capitalization, calculated as share price (CRSP: PRC) multiplies the number of

shares outstanding (CRSP: SHROUT), of the bidder one fiscal year prior to the announcement date.

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Third, in order to study the proportion of bids paid in cash or stock, we exclude deals whose payment are coded in ‘cash

only’ and ‘stock only’ but their corresponding percentage of cash or stock are missing or unequal to 100. And we also

exclude those coded in ‘cash and stock combination’ but the sum of percentage of cash and stock is unequal to 100.

Fourth, we require that all observations have sufficient data to calculate primary accounting conservatism measures. This

leaves us a total sample of 7505 deals.

Table 1 reports the distribution of the sample of 7505 deals from 1980 to 2012

<Table 1>

Like Francis and Martin (2010), the number of acquisitions peaks in 1998. Table 3.1 also shows the trend, which is similar to

Dong et al. (2006) who find deals made in the 1990s are more ‘supportive’ of misvaluation hypothesis. After 2001, more

deals are paid in cash.

3. Empirical Results

3. 1 Descriptive Statistics

This part provides the winsorized6 descriptive statistic results of samples. Table 3.2 reports the descriptive statics of firm and

deal characteristics in the sample including 7505 deals from 1980 to 2012.

<Table 2 >

In Table 2, the mean 3-year-accumulated non-operational accruals, Accumulated non-operational accruals and 5-year-

average non-operational accrual are 0.115, 0.028 and 0.043 respectively. The mean book leverage and market leverage are

0.209 and 0. 177. Average Log sales is 5.648. The mean of Market to book ratio is 2. The profitability is 0.16. The

percentage of cash in the payment is 0.612 and the relative size of target to bid is 0.288. The average percentage of cash

component in the deal payment is 0.612.

Table 3 reports the summary statistics of the acquirer sample classified by payment methods.

<Table 3>

Overall, during 1980 to 2012, 4131 deals are paid by cash, 2231 by stock and 1142 by cash and stock mix. All firm

characteristic variables are measured in the year prior to the deal announcement. The median (mean) of 3-year-accumulated

non-operational accruals is 0.056 (0.092) for cash deals, 0.069 (0.141) for stock deals and 0.068 (0.144) for mix deals. The

median (mean) of Accumulated non-operational accruals is 0.011(0.021) for cash deals, 0.013 (0.037) for stock deals and

0.014 (0.034) for mix deals. The median (mean) of 5-year average accruals is 0.021 (0.037) for cash deals, 0.028 (0.051) for

stock deals and 0.025 (0.055) for mix deals. The results show that stock payment is relating to higher average accounting

conservatism proxies indexrs.

6 To eliminate the effect of outliers, all variables are winsorized at the top and bottom 1% levels.

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The median (mean) of s market to book is 1.866 (1.574) for cash deals, 2.658 (1.969) for stock deals and 2.132 (1.654) for

mix deals. Consistent with effects of growth opportunity Martin (1996) and stock market overvaluation, Shleifer and Vishny

(2003), higher market to book ratio and higher stock returns increase the probability of stock financing.

The median (mean) of s market leverage is 0.194 (0.144) for cash deals, 0.15 (0.075) for stock deals and 0.166 (0.103) for

mix deals. The results of leverage is mixed, the leverage may not be the only factor to determine the payment method.

The median (mean) of s relative size of target to acquirer is 0.193(0.074) for cash deals, 0.341 (0.12) for stock deals and

0.326 (0.141) for mix deals. Consistence to Faccio and Masulis (2005) the relative size and percentage of cash in the

payment are negatively related.

More than 40% of subsidiary targets are paid by cash, consistent to Faccio and Masulis (2005), firms ‘selling subsidiaries are

often motivated by financial distress concerns or a desire to restructure toward their core competency’, therefore ‘there is a

strong preference for cash consideration’.

3.2 The association of accounting conservatism and merger and acquisition payment choices –Accounting

conservatism and proportion of cash component in the deal payment

In this section, following Faccio and Ronald (2005), we use tobit regressions to show the relation between accounting

conservatism and the proportion of cash component in the merger and acquisition payment.

<Table 4>

In Table 4, Model 1 shows that the higher the accounting conservatism, the lower the proportion of cash in the payment. The

results shows that increase in 3-year-accumulated non-operational accruals will reduce 0.33% of cash paid for the

acquisition. Model 2 indicates that the higher the accounting conservatism, the lower the proportion of cash in the payment.

The results shows that increase in accumulated non-operational accrual will reduce 1.43% of cash paid for the acquisition.

Model 3 demonstrates that the higher the accounting conservatism, the lower the proportion of cash in the payment. The

results shows that increase in 5-year-average non-operational accrual will reduce 0.67% of cash paid for the acquisition.

As to other firm and deal characteristics, Table 4 also show that firms whose market to book ratio is higher are less likely to

pay for the deal with cash and have lower proportion of cash in the payment, consistent to previous studies such as Jung,

Kim, and Stulz (1995), Martin (1996), Shleifer and Vishny (2003) and Uysal (2011). Firms with higher stock return in the

pre-acquisition year would less likely to pay for the deal with cash or increase the percentage of cash in the payment (Uysal,

2011). Besides, large acquirer firms are likely to use finance the acquisitions with cash or higher percentage of cash (Uysal,

2011). Also, we find that profitable acquirer firms are more likely use cash or higher component of cash to finance their

deals. The larger the size of target to acquirer, the less likely the firm will and the lower percentage of cash will be paid for

the deal. When competing with other acquirers, firms are likely to use cash. Acquirers will not likely to use cash to pay for

the deal using pooling of interest method.

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3. 3 The association of accounting conservatism and merger and acquisition payment choices –All-Cash or All-Stock

This section investigates the relationship between accounting conservatism and probability of the deal is financed by cash

only. Following previous studies such as Martin (1996), Malmendier and Tate (2008), and Usyal (2011), we use Cash

(Stock) only as the dependent variable, the dummy variable, equals to 1 if the deal is paid by cash (stock) only, otherwise 0.

The samples include deals from 1980 to 2012. Following previous literatures, such as Faulkender and Wang 2006, Uysal

(2011), Francis, Hasan, and Wu (2013), the financial firms (SIC Code 6000-6999) and regulated utilities firms (SIC Code

4900-4999) are excluded.

Table 5 shows the probit regression results of the relationship Accounting Conservatism and All-Cash payment. In this table,

accounting conservatism is measured by 3-year-accumulated non-operational accruals, accumulated non-operational

accruals, and 5-year-average non-operational accruals..

<Table 5>

The results in Table 5 indicate accounting conservatism has negative and significant effect on the probability of all-cash

financed deals, in another word, the more conservative the firms’ financial reporting, the less likely such firm will use all-

cash to finance for their acquisitions. All Models report significant results between accounting conservatism and merger and

acquisition payment. Model 1 shows that 1% increases in 3-year-accumulated non-operational accruals will reduce more

than 0.27% of probability that the firm finance for the acquisition by cash only. Model 2 shows that 1% increases in the

accumulated non-operational accrual will reduce more than 1% of probability that the firm finance for the acquisition by

cash only. Model 3 shows that 1% increases in the 5-year-average non-operational accrual will reduce more than 0.52% of

probability that the firm finance for the acquisition by cash only.

Table 6 shows the probit regression results of the relationship Accounting Conservatism and All-Stock payment. In this

table, accounting conservatism is measured by 3-year-accumulated non-operational accruals, accumulated non-operational

accruals, and 5-year-average non-operational accruals.

<Table 6>

In Model 1, 1% increases in the 3-year-accumulated non-operational accruals will increase 0.16% of probability that the firm

finance for the acquisition by stock only. In Model 2, 1% increases in the accumulated non-operational accrual will increase

0.94% of probability that the firm finance for the acquisition by stock only. In Model 3, 1% increases in the 5-year-average

non-operational accrual will increase 0.30% of probability that the firm finance for the acquisition by stock only, but the

result of is insignificant.

Collectively, the results of both Table 5 and 6 are consistent to our hypothesis, firm with conservatism financial reporting

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would less likely to finance their acquisition project with cash.

Other firm characteristics variables also have significant effects on the payment form. Acquirer firms with higher market to

book ratio are less (more) likely to pay for the deal with cash (stock), consistent to previous studies such as Jung, Kim, and

Stulz (1995), Martin (1996), Shleifer and Vishny (2003) and Uysal (2011), who find that firm with large growth

opportunities and stock overvaluation are less likely to use cash to finance the mergers and acquisition. Firms with higher

stock return in the pre-acquisition year would less likely to pay for the deal with cash (Uysal, 2011). Besides, large firms are

can better access to debt markets due to more stable cash flows (Titman and Wessels, 1988), thus, they are more (less) likely

to use all-cash (all-stock) to finance the acquisitions (Uysal, 2011). Also, we find that profitable acquirer firms are more

(less) likely use cash (stock) to finance the deal, like the findings in Uysal (2011).

On the other hand, the deal characteristics variables also have significant effect on all-cash payment. The relative size of

target to acquirer is also negatively (positively) significantly related to the probability of use all-cash (all-stock) as the

payment, which is in line with Hansen (1987) and Faccio and Masulis (2005), acquirer firms have greater incentives to pay

for the deal with stock when they access to asymmetric information about the target firms’ assets, and this information

asymmetry is more likely to rise positively with the relative size of target assets to those of acquirers’ assets, furthermore, the

acquirer firms’ risk from the acquisition activity increases with target firm size, and stock financing makes the target

shareholders bear some of the risk of (Martin 1996 and Ayers et al. 2004). We also find that when there are more than one

bidders for the same targets, firms are likely to use cash to ‘sweeten’ the deals by paying cash as a strategy to deter potential

bidders (Berkovitch and Narayanan, 1990). Finally, we find acquirer firms are also less likely use cash when their industries

have high mergers and acquisitions liquidity, similar to the finding of Harford (2005) and Uysal (2011). Similar to Uysal

(2011), we find the acquirers are unlikely (likely) to pay for the deal with all cash, if the target is a Public target firm or a

Private target firmate firm.

3.4 The association of accounting conservatism and merger and acquisition payment choices under the purchase

method

Since firms are likely to use stock to bid based under the pooling of interest method, in order to show whether or not

accounting conservatism shows effects on payment method based on same accounting method, we eliminate all the deals

using pooling of interest method, following Aboody et al. (2000) and use a subsample labelled as ‘Purchase method only’.

We use both ordered probit regressions and tobit regressions to work out the results7.

According to accounting method for mergers and acquisitions, we find those acquirer firms using pooling of interest method

are less likely to use all-cash to finance the acquisition. This is due to guidelines of using the pooling of interest method.

Unlike purchase method, in the pooling method, the book value rather than fair market value of the target firms’ assets,

liabilities, and equities are simply added to the acquirer firms, no purchase price allocation, no goodwill recognition,

amortisation or impairment. Using pooling of interest method, the firm should meet specific criteria, e.g. this method cannot

be used, in pure cash offers since the acquired firm’s stockholders maintain an ownership position in the merged firm

7 We also use probit regressions with dependent variable of cash only and stock only respectively, the unreported results are similar to table 3.6, 3.7 and 3.8.

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(Huang and Walkling, 1987).

<Table 7>

Overall, Table 7 shows that neither pooling of interest method or the purchase method would show no effect on the negative

relation between accounting conservatism and the probability for the acquirer firms use all-cash payment and/or use the

payment with high proportion of cash component

3.5 The association of accounting conservatism and merger and acquisition payment choices using Basu’s (1997)

asymmetric timeliness of earnings

Basu’s (1997) asymmetric timeliness of earnings is widely used, although it has been received critics. For example,

Roychowdhury (2010) argue that ‘Timely loss recognition by itself (without less timely gain recognition), does not result in

the deferral of good news in earnings relative to bad news, nor is it sufficient to induce an understatement in net assets. ’

The primary measurement of accounting conservatism is using Basu’s (1997) model:

Earningst = β0 + β1*Dt + β2*Rett + β3*Rett* Dt + εt Eq. (1)

Where t indexes time, Earnings is income before extraordinary items scaled by market value of equity at the end of fiscal

year, Ret is 12-month compound returns, which is three months after the fiscal year end. D, a dummy variable, equals to 1

when Ret is negative and 0 otherwise, and ε is the residual. Ret, stock returns, is used as a proxy for economic gains and

losses. If the verification standard for losses is lower than for gains, earnings will recognise economic losses faster than

gains. Therefore, the association between earnings and stock returns should be incrementally higher when stock returns are

negative (Basu, 1997). Hence, the coefficient β3 on D*RET measures the incremental timeliness of loss recognition in

earnings relative to gains, i.e. accounting conservatism.

We use the baseline Basu (1997) model in Eq. (1) by including the choice of payment method for the deal (Payment) in the

following regression model:

Earningst-1 = β0 + β1*Dt-1 + β2*Rett-1 + β3*Rett-1* Dt-1

+ β4*Paymentt +β5*Paymentt *Dt-1+β6* Paymentt *Rett-1 + β7 *Paymentt * Rett-1* Dt

+εt Eq. (2)

We use the baseline Basu (1997) model in Eq. (1) by including the choice of payment method for the deal (Payment) along

with additional firm-level controls in the following regression model:

Earningst-1 = β0 + β1*Dt-1 + β2*Rett-1 + β3*Rett-1* Dt-1

+ β4*Paymentt +β5*Paymentt *Dt-1+β6* Paymentt *Rett-1 + β7 *Paymentt * Rett-1* Dt

+β8* MTBt-1 +β9* MTBt-1 *Dt-1+β10* MTBt-1 *Rett-1+β11* MTBt-1 *Rett-1* Dt-1

+β12* Market Leveraget-1+β13* Market Leveraget-1*Dt-1 +β14* Market Leveraget-1*Rett-1+β15 * Market Leveraget-1* Rett-1* Dt-1

+β16* Firm sizet-1 +β17* Firm sizet-1 *Dt-1 +β18* Firm sizet-1 *Rett-1 + β19* Firm sizet-1 * Rett-1* Dt-1

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+β20*Ltigationt-1 +β21 *Ltigationt-1 *Dt-1 +β22*Ltigationt-1 *Rett-1 + β23*Ltigationt-1 * Rett-1* Dt-1 +εt Eq. (3)

We also use the baseline Basu (1997) model in Eq. (1) by including the choice of payment method for the deal (Payment)

along with additional firm-level and deal level controls in the following regression model:

Earningst-1 = β0 + β1*Dt-1 + β2*Rett-1 + β3*Rett-1* Dt-1

+ β4*Paymentt +β5*Paymentt *Dt-1+β6* Paymentt *Rett-1 + β7 *Paymentt * Rett-1* Dt

+β8* MTBt-1 +β9* MTBt-1 *Dt-1+β10* MTBt-1 *Rett-1+β11* MTBt-1 *Rett-1* Dt-1

+β12* Market Leveraget-1+β13* Market Leveraget-1*Dt-1 +β14* Market Leveraget-1*Rett-1+β15 * Market Leveraget-1* Rett-1* Dt-1

+β16* Firm sizet-1 +β17* Firm sizet-1 *Dt-1 +β18* Firm sizet-1 *Rett-1 + β19* Firm sizet-1 * Rett-1* Dt-1

+β20*Cross-Industryt-1+β21*Cross-Industryt-1 *Dt-1+β22* Cross-Industryt-1 *Rett-1+β23* Cross-Industryt-1 *Rett-1* Dt-1

+β24*Public Targett-1+β25*Public Targett-1*Dt-1 +β26*Public Targett-1*Rett-1+β27*Public Targett-1* Rett-1* Dt-1

+β28*Private Targett-1+β29* Private Targett-1*Dt-1 +β30*Private Targett-1*Rett-1+β31* Private Targett-1* Rett-1* Dt-1

+β32*Pooling of interest methodt-1+β33*Pooling of interest methodt-1*Dt-1 +β34*Pooling of interest methodt-1*Rett-1+β35*Pooling of interest methodt-

1* Rett-1* Dt-1

+β36*Competet-1+β37*Competet-1*Dt-1 +β38*Competet-1*Rett-1+β39* Competet-1*Rett-1*Dt-1

+β40*Relative sizet-1+β41*Relative sizet-1*Dt-1+β42*Relative sizet-1*Rett-1+β43*Relative sizet-1*Rett-1*Dt-1

+β44*Ltigationt-1 +β45 *Ltigationt-1 *Dt-1 +β46*Ltigationt-1 *Rett-1 + β47*Ltigationt-1 * Rett-1* Dt-1 +εt Eq. (4)

Table 8 report the results of Equation 1,2 3 and 4, Following Faccio and Masulis (2005), Harford et al. (2009) and Usyal

(2011), POC, Percentage of Cash, is the proportion of cash component in the payment.

<Table 8>

Model 1 shows the baseline of regression of Basu (1997), Equation 1, based on 7505 deals observations from 1980 to 2012,

one year prior to the announcement of an acquisition. We the coefficient (β3) of Ret*D is positive and significant indicating

losses are recognised at a timely basis, showing the baseline regression still works on this smaller sample. Model 2 shows the

regression results of the Equation 2 without firm character control variables, Model 3 reports the results of Equation 3 with

firm-level control variables, Model 3 reports the results of Equation 3 with firm-level control variables, Model 4 reports the

results of Equation 4 with both firm- and deal- level control variables. All models are consistent to our prediction, the

coefficient (β7) of RET*D*Percentage of cash is negative and highly significant. The results show that accounting

conservatism make firms less likely to pay for the deal with cash. In Model 2,3 and 4, we also follow Francis and Martin

(2010), Ahmed and Duellman (2013) and Kravet (2014) to tests we perform a joint test of the sum of the coefficients

Percentage of casht *Rett-1 and Percentage of casht * Rett-1* Dt-1 , that is, (β6* + β7 =0), since the coefficient of Percentage of casht

* Rett-1* Dt- 1 by itself does not indicate whether or not the loss recognition is less timely for acquirer firms choosing lower

cash component payment method to other acquirer firms. We find that this sum is also significantly negative. Table 8 shows

the similar results when we use firm-specific accounting conservatism measures.

To further prove the results of Table 8, in Table 9 and 10, we use All-cash dummy and All-stock dummy to represent method

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of payment respectively. Table 9 and 10 report the result of the relation between accounting conservatism and mergers and

acquisitions payment method

<Table 9>

<Table 10>

The results in Table 9 and 10 shows a significant and negative (positive) relation between the accounting conservatism and

the percentage of cash component in the payment as well as the probability of all cash (stock) payment. The results are not

affected when adding firm and deal characteristics.

Other measurements of accounting conservatism include, such as C score, Skenwness of profit and operation cash flows, and

Market to Book ratio. C Score measured accounting conservatism, to some extent, conflict to those using accruals and/or

measured accounting conservatism. C score is calculated based on a linear function which contains firm’s capital structure,

market to book ratio and firm size, all of which are important determinants of merger and acquisition payment choice and

used in all merger and acquisition studies within my knowledge. Therefore, the results of using C score as the proxy of

accounting conservatism are relatively noisy. Skenwness of profit and operation cash flows is not the appropriate measure in

this paper, since profit and cash flow are closely relates to merger and acquisition payment. Market to book ratio is included

in all models in this paper, it is used as a firm characteristic, a control variable, measuring market misevaluation and growth

opportunities rather than accounting conservatism.

4. Summary and conclusion.

This paper exams whether or not accounting conservatism determine the choice of merger and acquisition payment method

using a large sample of deals made from 1980 to 2012. By using 3-year-accumulated non-operational accruals, accumulated

non-operational accruals and 5-year-average non-operational accruals as the main measurement of accounting conservatism,

we find that the likelihood of mergers and acquisitions that are paid with all-cash is negatively related to the

conservativeness of acquirer firms’ financial reporting, and the fraction of acquisitions paid with cash versus stock is also

negatively related accounting conservatism. These findings support the previous research that firms with conservative

financial statements are likely to use equity to finance their investment projects. We following the similar method as Francis

and Martin (2010) and Kravet (2014) to use Basu’s (1997) asymmetric timeliness of earnings model to estimate the relation

between accounting conservatism and merger and acquisition payment method choice, and find firms with higher

conservative financial reports are less likely to use all cash payment or payment with higher cash component to pay for the

deal, similar to the results using firm specific accounting conservatism measures.

This study makes several contributions. First, this study contributes to accounting conservatism literature. This study goes

beyond the previous research and explores how the conservatism accounting principle influences on firms’ financing choice

when they confront acquisitions, the largest corporate investment projects. On the other hand, our study goes beyond Francis

and Martin (2010) and Kravet (2014), it focuses on the association of accounting conservatism and good merger and

acquisition outcomes and risks, however, this study focuses on the association of accounting conservatism and acquisition

financing decisions.

11

On the other hand, this study contributes to the corporate finance literature on the interrelation between financing and

investment. This study explains that conservative accounting policy is an important factor that constrains firms’ debt

financing ability and affects firms’ financing decision for investments.

Finally, this study contributes to the merger and acquisition literature, this study indicates that accounting conservatism leads

to the relatively weak financial position so that it reduces firms’ ability to access debt capital, leading to less likelihood of all

cash payment and/or lower cash component in the deal payment.

12

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17

Appendix: Definition of Variables

3-year-accumulated non-operational accruals, the negative of the ratio of nonoperating

accruals to total assets cumulated over the previous three years.

5-year-average non-operational accrual, the negative of the ratio of nonoperating

accruals to total assets averaged over the previous three years.

Accumulated nonoperating accruals are multiplied by negative one so that the value of

the conservatism proxy increases with a firm’s level of conservatism. 

Book Debt is TA minus BE.

Book Equity (BE) is defined as TA minus liabilities (Item 181) plus balance sheet

deferred taxes and investment tax credit (Item35) minus PS.

Book Leverage Deficit is actual leverage minus predicted target debt ratio.

Book Leverage is Book Debt over TA..

CAR is the cumulative abnormal returns (in percentage) which are calculated over a

three day event window (two days before and two days after the announcement date).

The benchmark returns are the value-weighted index of returns including dividends for

the combined New York Stock Exchange, American Stock Exchange and NASDAQ.

Combo takes value of one if deal is financed by both stock and cash.

Competed takes value of one if there are more than one offers for the target.

EBITDA/TA is EBITDA (Item13) over lagged TA.

Hostile takes value of 1 if the management describes the deal as unfriendly.

Industry M&A Liquidity is the ratio of value of total transaction value of within

industry acquisitions for each year and Fama-French industry to the total value of assets

of all COMPUSTAT firms in the same year and Fama-French industry (1997).Focus

takes value of one if target and acquirer are categorized in the same Fama-French

industry grouping.

Market Equity (ME) is common shares outstanding (Item 25) times the stock price

(Item

Market Leverage is Book Debt over MV.

Market Value (MV) is defined as liabilities (Item181) minus balance sheet deferred

taxes and investment tax credit (Item35) plus PS plus ME.

Market-to-Book ratio is defined as MV over TA.

Nonoperating accruals are defined as net income (Item172) plus depreciation (Item14)

minus cash flow from operations (Item308) minus change in accounts receivable

(Item2) minus change in inventories (Item3) minus change in prepaid expenses

(Item160) plus change in accounts payable (Item70) plus change in tax payable

(Item71). Cash flow from operations (Item308) If Item308 is missing, we estimate cash

flow from operations as funds from operations (Item110) minus change in current

assets (Item4) minus change in short term debt (Item34) plus change in current

18

liabilities (Item5) plus change in cash (Item1).

Preferred Stock (PS) is equal to liquidating value (Item 10) if available, else

redemption value (Item 56) if available, else carrying value (Item 130).

Private takes value of one if target is a private firm.

Public takes value of one if target is a public firm.

R&D Dummy takes the value of one if COMPUSTAT reports R&D expense as

missing.

R&D/ TA is defined as R&D expenses (Item 46) over TA.

Relative Size is the ratio of transaction value to the market value of acquirer.

RET is the buy and hold return of firm over the period beginning four months after the

beginning of its fiscal year. D is a dummy variable equal to 1 when RET is negative,

and 0 otherwise.

Sales is the natural logarithm of sales (Item 12) in 1987 dollars.

Skewness, is the difference between the skewness in cash flows (Item 308/ Item 6) and

earnings (Item 172/ Item 6). We measure skewness using a maximum of 20 quarters

and a minimum of 5 quarters of Item prior to entering into the contract.

Stock is a dummy variable for all-stock deals.

Tangible Assets/ TA is net property, plant and equipment (Item 8) over TA.

Tender is a dummy for tender offers.

Total accrual is net income (Item172) plus depreciation (Item14) minus cash flow from

operations (Item308), If Item308 is missing, we estimate cash flow from operations as

funds from operations (Item110) minus change in current assets (Item4) minus change

in short term debt (Item34) plus change in current liabilities (Item5) plus change in

cash (Item1).

19

Tables

20

Table 1 Distribution of acquisitions sample by announcement year

Year NCash Payment Stock Payment Mix Payment

NPercentage N Percentage N Percentage

1980 5 4 80% 1 20% 0 0%1981 8 6 75% 2 25% 0 0%1982 1 1 100% 0 0% 0 0%1983 1 1 100% 0 0% 0 0%1984 11 7 64% 4 36% 0 0%1985 110 73 66% 30 27% 7 6%1986 103 67 65% 30 29% 6 6%1987 110 60 55% 39 35% 11 10%1988 114 77 68% 26 23% 11 10%1989 123 67 54% 45 37% 11 9%1990 124 74 60% 39 31% 11 9%1991 111 54 49% 38 34% 19 17%1992 162 64 40% 77 48% 21 13%1993 270 128 47% 113 42% 29 11%1994 288 116 40% 136 47% 36 13%1995 372 138 37% 195 52% 39 10%1996 463 161 35% 241 52% 61 13%1997 452 177 39% 194 43% 81 18%1998 542 244 45% 202 37% 96 18%1999 460 182 40% 203 44% 75 16%2000 376 143 38% 181 48% 52 14%2001 286 150 52% 94 33% 42 15%2002 306 196 64% 60 20% 50 16%2003 294 177 60% 61 21% 56 19%2004 372 260 70% 42 11% 70 19%2005 367 246 67% 35 10% 86 23%2006 352 266 76% 36 10% 50 14%2007 332 246 74% 26 8% 60 18%2008 210 150 71% 21 10% 39 19%2009 173 113 65% 29 17% 31 18%2010 233 182 78% 20 9% 31 13%2011 203 158 78% 11 5% 34 17%2012 171 143 84% 8 5% 27 16%Total 7505 4131 55% 2239 30% 1142 15%

21

Table 2 The descriptive statics of the sample. All firm characteristic variables are measured one fiscal year prior to the deal

announcement. All variables definitions are on the appendix.

Variables N MEAN STD MIN MAX

3-year-accumulated non-operational accruals 7505 0.115 0.270 -0.543 1.789 Accumulated non-operational accruals 7505 0.028 0.059 -0.106 0.3405-year-average non-operational accrual 7505 0.043 0.097 -0.172 0.653

Book Leverage 7505 0.209 0.192 0.000 0.551

Market Leverage 7505 0.177 0.188 0.000 0.642

Log Sales 7505 5.648 2.014 1.256 7.972

Market to Book Ratio 7505 2.145 1.355 1.120 5.145

ProfitabiLitigationy 7505 0.160 0.152 -0.115 0.259

Relative size 7505 0.288 1.159 0.010 28.864Percentage of cash in the payment 7505 0.612 0.458 0.000 1.000

22

Table 3 The summary statistics of the acquirer sample classified by payment methods. All firm characteristic variables are measured one fiscal year

prior to the deal announcement. All variables definitions are in the appendix

Cash Payment Stock payment Mix PaymentN Median Mean N Median Mean N Median Mean

3-year-accumulated non-operational accruals 4131 0.056 0.092 2239 0.069 0.141 1142 0.068 0.144

Accumulated non-operational accruals 4131 0.011 0.021 2239 0.013 0.037 1142 0.014 0.0345-year-average non-operational accrual 4131 0.021 0.037 2239 0.028 0.051 1142 0.025 0.055

Market Leverage 4131 0.144 0.194 2239 0.075 0.150 1142 0.103 0.166 Log Sales 4131 6.248 6.169 2239 5.143 5.006 1142 4.935 5.042 Market to Book Ratio 4131 1.574 1.866 2239 1.969 2.658 1142 1.654 2.132 Relative Size 4131 0.074 0.193 2239 0.120 0.341 1142 0.141 0.326 Profitability 4131 0.133 0.127 2239 0.112 0.062 1142 0.106 0.079 Target is a Public firm 4131 0.000 0.188 2239 0.000 0.384 1142 0.000 0.210 Target is a Private firm 4131 0.000 0.430 2239 0.000 0.096 1142 0.000 0.225 Cross-industry M &A 4131 0.000 0.383 2239 1.000 0.519 1142 1.000 0.565 Hostile 4131 0.000 0.437 2239 0.000 0.419 1142 0.000 0.394 Pooling of interest method 4131 0.000 0.009 2239 0.000 0.003 1142 0.000 0.004 Compete 4131 0.000 0.000 2239 0.000 0.347 1142 0.000 0.006 Target is a Public Target firm 4131 0.000 0.023 2239 0.000 0.011 1142 0.000 0.021

23

Table 4 reports the relation between accounting conservatism and merger and acquisition payment based tobit regressions, the dependent variable is

the proportion of cash in the payment. Model 1, accounting conservatism is measured by 3-year-accumulated non-operational accruals; Model 2,

accounting conservatism is measured by accumulated non-operational accrual; and Model 3, accounting conservatism is measured by 5-year-average

non-operational accruals. All variables definitions are in the appendix.

Variables Model 1 Model 2 Model 3

Coef. P value Coef. P value Coef. P value

3-year-accumulated non-operational accruals -0.333 (0.002)

Accumulated non-operational accruals -1.430 (0.001)

5-year-average non-operational accrual -0.676 (0.039)

Market Leverage 0.231 (0.000) 0.231 (0.000) 0.181 (0.002)Stock return -0.122 (0.003) -0.113 (0.007) -0.109 (0.018)Market to book ratio -0.071 (0.000) -0.072 (0.000) -0.075 (0.000)Profitability 2.472 (0.000) 2.506 (0.000) 2.567 (0.000)Firm size 0.165 (0.000) 0.163 (0.000) 0.175 (0.000)Public target firm -1.666 (0.000) -1.681 (0.000) -1.694 (0.000)Private target firm -1.025 (0.000) -1.049 (0.000) -1.043 (0.000)Pooling of interest -4.498 (0.000) -4.537 (0.000) -4.582 (0.000)Compete 1.366 (0.000) 1.394 (0.000) 1.455 (0.000)Cross Industry -0.019 (0.734) -0.026 (0.644) -0.057 (0.359)Relative size -0.204 (0.001) -0.209 (0.001) -0.200 (0.004)

Industry mergers and acquisitions activity -1.931 (0.117) -1.829 (0.136) -1.754 (0.183)

Herfindahl index 0.031 (0.910) -0.008 (0.974) -0.111 (0.708)Year fixed effect Yes Yes YesIndustry fixed effect Yes Yes YesObservations 7505 7505 7505Pseudo R2 0.291 0.290 0.284

24

Table 5 reports the relation between accounting conservatism and merger and acquisition payment based probit regressions, the dependent variable equals to 1 if the deals are paid by cash only. Model 1, accounting conservatism is measured by 3-year-accumulated non-operational accruals; Model 2, accounting conservatism is measured by accumulated non-operational accrual; and Model 3, accounting conservatism is measured by 5-year-average non-operational accruals. All variables definitions are in the appendix.

Variables Model 1 Model 2 Model 3

Coef. P value Coef. P value Coef. P value

3-year-accumulated non-operational accruals -0.273 (0.001)

Accumulated non-operational accruals -1.068 (0.005)

5-year-average non-operational accrual -0.525 (0.032)

Market Leverage 0.180 (0.000) 0.179 (0.000) 0.145 (0.000)Stock return -0.119 (0.000) -0.113 (0.000) -0.101 (0.003)Market to book ratio -0.048 (0.000) -0.049 (0.000) -0.053 (0.000)Profitability 1.968 (0.000) 2.002 (0.000) 1.975 (0.000)Firm size 0.133 (0.000) 0.130 (0.000) 0.138 (0.000)Public target firm -1.050 (0.000) -1.056 (0.000) -1.047 (0.000)Private target firm -0.701 (0.000) -0.711 (0.000) -0.693 (0.000)Pooling of interest -3.036 (0.000) -3.035 (0.000) -3.041 (0.000)Compete 0.857 (0.000) 0.882 (0.000) 0.875 (0.000)Cross Industry -0.025 (0.543) -0.026 (0.531) -0.046 (0.291)Relative size -0.146 (0.008) -0.151 (0.004) -0.141 (0.018)Industry mergers and acquisitions activity -1.908 (0.040) -1.808 (0.049) -1.654 (0.085)Herfindahl index 0.037 (0.850) 0.012 (0.951) -0.015 (0.944)Year fixed effect Yes Yes YesIndustry fixed effect Yes Yes YesObservations 7505 7505 7505Pseudo R2 0.315 0.314 0.308

25

Table 6 reports the relation between accounting conservatism and merger and acquisition payment based probit regressions, the dependent variable equals to 1 if the deals are paid by stock only. Model 1, accounting conservatism is measured by 3-year-accumulated non-operational accruals; Model 2, accounting conservatism is measured by accumulated non-operational accrual; and Model 3, accounting conservatism is measured by 5-year-average non-operational accruals. All variables definitions are in the appendix.

Variables Model 1 Model 2 Model 3

Coef. P value Coef. P value Coef. P value3-year-accumulated non-operational accruals 0.166 (0.057)

Accumulated non-operational accruals 0.942 (0.007)

5-year-average non-operational accrual 0.307 (0.263)Market Leverage -0.083 (0.055) -0.083 (0.047) -0.046 (0.273)Stock return 0.035 (0.304) 0.029 (0.396) 0.027 (0.466)Market to book ratio 0.047 (0.000) 0.047 (0.000) 0.047 (0.000)Profitability -1.519 (0.000) -1.501 (0.000) -1.591 (0.000)Firm size -0.073 (0.000) -0.073 (0.000) -0.075 (0.000)Public target firm 1.161 (0.000) 1.157 (0.000) 1.151 (0.000)Private target firm 0.660 (0.000) 0.668 (0.000) 0.649 (0.000)Pooling of interest 2.929 (0.000) 2.946 (0.000) 2.909 (0.000)Compete -0.975 (0.000) -0.979 (0.000) -1.061 (0.000)Cross Industry 0.041 (0.357) 0.052 (0.242) 0.067 (0.158)Relative size 0.113 (0.001) 0.116 (0.001) 0.104 (0.006)Industry mergers and acquisitions activity 0.498 (0.594) 0.479 (0.603) 0.288 (0.771)Herfindahl index 0.052 (0.811) 0.075 (0.720) 0.181 (0.425)Year fixed effect Yes Yes YesIndustry fixed effect Yes Yes YesObservations 7505 7505 7505Pseudo R2 0.406 0.404 0.400

26

Table 7 reports the relation between accounting conservatism and merger and acquisition payment using purchase method only based tobit

regressions, the dependent variable is the proportion of cash in the payment. Model 1, accounting conservatism is measured by 3-year-accumulated

non-operational accruals; Model 2, accounting conservatism is measured by accumulated non-operational accrual; and Model 3, accounting

conservatism is measured by 5-year-average non-operational accruals. All variables definitions are in the appendix.

Variables Model 1 Model 2 Model 3

Coef. P value Coef. P value Coef. P value

3-year-accumulated non-operational accruals -0.334 (0.002)

Accumulated non-operational accruals -1.386 (0.002)

5-year-average non-operational accrual -0.656 (0.045)Market Leverage 0.228 (0.000) 0.228 (0.000) 0.177 (0.003)Stock return -0.134 (0.001) -0.125 (0.003) -0.123 (0.007)Market to book ratio -0.071 (0.000) -0.072 (0.000) -0.075 (0.000)Profitability 2.483 (0.000) 2.521 (0.000) 2.585 (0.000)Firm size 0.165 (0.000) 0.164 (0.000) 0.175 (0.000)Public target firm -1.677 (0.000) -1.692 (0.000) -1.705 (0.000)Private target firm -1.027 (0.000) -1.052 (0.000) -1.046 (0.000)Compete 1.384 (0.000) 1.412 (0.000) 1.479 (0.000)Cross Industry -0.025 (0.668) -0.031 (0.587) -0.063 (0.313)Relative size -0.207 (0.001) -0.212 (0.001) -0.203 (0.004)Industry mergers and acquisitions activity -2.076 (0.093) -1.971 (0.110) -1.931 (0.144)Herfindahl index 0.03 (0.911) -0.008 (0.975) -0.112 (0.706)Year fixed effect Yes Yes YesIndustry fixed effect Yes Yes YesObservations 5977 5977 5977Pseudo R2 0.169 0.170 0.165

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Table 8 shows the results of the relation between accounting conservatism and merger and acquisition payment choice. The payment variable is the

percentage of cash component in the payment. Model 1 is an OLS regression without considering merger and acquisition variables and other firm and

deal characteristics; Model 2 an OLS regression considering merger and acquisition payment only without other firm and deal characteristics; Model

3 is an OLS regression considering merger and acquisition payment and other firm characteristics; Model 4 is an OLS regression considering merger

and acquisition payment and other firm and deal characteristics; All variables definitions are in the appendix

Variables Model 1 Model 2 Model 3 Model 4Coef. P value Coef. P value Coef. P value Coef. P value

RET -0.015 (0.000) -0.005 (0.094) -0.008 (0.351) -0.001 (0.958)D 0.051 (0.000) 0.054 (0.010) 0.082 (0.056) 0.121 (0.018)RET*D 0.495 (0.000) 0.571 (0.000) 0.875 (0.000) 1.059 (0.000)RET*Percentage of cash 0.001 (0.712) 0.001 (0.809) 0.001 (0.832)D* Percentage of cash -0.026 (0.282) -0.045 (0.039) -0.043 (0.129)RET*D* Percentage of cash -0.259 (0.017) -0.298 (0.002) -0.320 (0.009)Percentage of cash 0.038 (0.000) 0.032 (0.000) 0.042 (0.000)RET*Market to Book ratio 0.000 (0.207) 0.001 (0.171)D*Market to Book ratio -0.003 (0.171) -0.003 (0.313)RET*D*Market to Book ratio -0.017 (0.053) -0.014 (0.117)Market to Book ratio -0.003 (0.000) -0.003 (0.000)RET*Market leverage 0.013 (0.204) 0.015 (0.183)D*Market leverage 0.019 (0.510) 0.019 (0.528)RET*D*Market leverage 0.187 (0.024) 0.178 (0.028)Market leverage -0.022 (0.077) -0.022 (0.117)RET*Firm size 0.001 (0.563) 0.000 (0.765)D*Firm size -0.007 (0.252) -0.013 (0.044)RET*D*Firm size -0.089 (0.001) -0.117 (0.000)Firm size 0.012 (0.000) 0.013 (0.000)RET*Cross-Industry 0.001 (0.681)D*Cross-Industry -0.058 (0.000)RET*D*Cross-Industry -0.281 (0.000)Cross-Industry -0.001 (0.835)RET*Public Target 0.001 (0.882)D*Public Target 0.012 (0.663)RET*D*Public Target 0.045 (0.730)Public Target 0.007 (0.176)RET*Private Target -0.006 (0.211)D*Private Target -0.001 (0.960)RET*D*Private Target 0.049 (0.560)Private Target 0.012 (0.037)RET*Pooling of interest method 0.009 (0.052)D*Pooling of interest method -0.008 (0.791)RET*D*Pooling of interest method -0.261 (0.019)Pooling of interest method 0.008 (0.319)RET*Compete -0.001 (0.948)D*Compete 0.138 (0.109)RET*D*Compete 0.812 (0.146)Compete -0.006 (0.572)RET*Relative size -0.005 (0.334)D*Relative size 0.015 (0.634)RET*D*Relative size 0.105 (0.416)Relative size 0.001 (0.891)RET*Litigation 0.003 (0.536) 0.005 (0.335)D*Litigation 0.049 (0.005) 0.050 (0.007)RET*D*Litigation 0.277 (0.001) 0.202 (0.015)Litigation -0.083 (0.061) -0.100 (0.021)

β6+ β7 =0 -0.257 (0.017) -0.296 (0.002) -0.318 (0.009)Year fixed effect No Yes Yes YesIndustry fixed effect No Yes Yes YesObservations 7505 7505 7505 7505R2 0.132 0.190 0.291 0.340

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Table 9 shows the results of the relation between accounting conservatism and merger and acquisition payment choice using Basu’s (1997) asymmetric timeliness of earnings. The payment variable equals to 1 if the payment method is cash only and 0 otherwise. Model 1 is an OLS regression considering merger and acquisition payment and other firm characteristics; Model 2 is an OLS regression considering merger and acquisition payment and other firm and deal characteristics; All variables definitions are in the appendix

Variables Model 1 Model 2Coef. P value Coef. P value

RET -0.009 (0.271) -0.003 (0.802)D 0.075 (0.071) 0.108 (0.027)RET*D 0.850 (0.000) 1.031 (0.000)RET*All-cash dummy 0.004 (0.232) 0.005 (0.227)D* All-cash dummy -0.036 (0.059) -0.030 (0.170)RET*D* All-cash dummy -0.309 (0.000) -0.325 (0.001)All-cash dummy 0.022 (0.000) 0.024 (0.000)RET*Market to Book ratio 0.001 (0.156) 0.001 (0.155)D*Market to Book ratio -0.003 (0.198) -0.002 (0.350)RET*D*Market to Book ratio -0.017 (0.053) -0.013 (0.123)Market to Book ratio -0.003 (0.000) -0.004 (0.000)RET*Market leverage 0.013 (0.190) 0.015 (0.168)D*Market leverage 0.017 (0.546) 0.017 (0.569)RET*D*Market leverage 0.185 (0.024) 0.177 (0.028)Market leverage -0.022 (0.086) -0.021 (0.134)RET*Firm size 0.001 (0.627) -0.001 (0.741)D*Firm size -0.007 (0.236) -0.013 (0.037)RET*D*Firm size -0.088 (0.001) -0.117 (0.000)Firm size 0.011 (0.000) 0.013 (0.000)RET*Cross-Industry 0.002 (0.543)D*Cross-Industry -0.057 (0.000)RET*D*Cross-Industry -0.279 (0.000)Cross-Industry -0.002 (0.724)RET*Public Target 0.000 (0.931)D*Public Target 0.014 (0.569)RET*D*Public Target 0.048 (0.674)Public Target 0.004 (0.486)RET*Private Target -0.005 (0.213)D*Private Target 0.003 (0.883)RET*D*Private Target 0.051 (0.563)Private Target 0.010 (0.087)RET*Pooling of interest method 0.012 (0.007)D*Pooling of interest method 0.002 (0.942)RET*D*Pooling of interest method -0.237 (0.016)Pooling of interest method -0.005 (0.510)RET*Compete -0.003 (0.793)D*Compete 0.129 (0.146)RET*D*Compete 0.766 (0.186)Compete -0.002 (0.857)RET*Relative size -0.005 (0.319)D*Relative size 0.017 (0.598)RET*D*Relative size 0.108 (0.409)Relative size 0.001 (0.915)RET*Litigation 0.003 (0.523) 0.005 (0.297)D*Litigation 0.047 (0.008) 0.049 (0.011)RET*D*Litigation 0.278 (0.002) 0.203 (0.018)Litigation -0.078 (0.078) -0.094 (0.032)

β6+ β7 =0 -0.305 (0.000) -0.320 (0.001)Year fixed effect Yes YesIndustry fixed effect Yes YesObservations 7505 7505

R2 0.293 0.340

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Table 10 shows the results of the relation between accounting conservatism and merger and acquisition payment choice using Basu’s (1997) asymmetric timeliness of earnings. The payment variable equals to 1 if the payment method is stock only and 0 otherwise. Model 1 is an OLS regression considering merger and acquisition payment and other firm characteristics; Model 2 is an OLS regression considering merger and acquisition payment and other firm and deal characteristics; All variables definitions are in the appendix

Variables Model 1 Model 2Coef. P value Coef. P value

RET -0.011 (0.198) -0.001 (0.955)D 0.042 (0.287) 0.080 (0.076)RET*D 0.649 (0.000) 0.796 (0.000)RET*All-stock dummy 0.004 (0.393) 0.003 (0.565)D* All-stock dummy 0.045 (0.052) 0.045 (0.141)RET*D* All-stock dummy 0.231 (0.014) 0.247 (0.046)All-stock dummy -0.030 (0.000) -0.037 (0.000)RET*Market to Book ratio 0.000 (0.262) 0.001 (0.203)D*Market to Book ratio -0.004 (0.142) -0.003 (0.278)RET*D*Market to Book ratio -0.017 (0.056) -0.013 (0.125)Market to Book ratio -0.003 (0.000) -0.004 (0.000)RET*Market leverage 0.015 (0.129) 0.017 (0.123)D*Market leverage 0.021 (0.485) 0.020 (0.505)RET*D*Market leverage 0.183 (0.029) 0.174 (0.033)Market leverage -0.023 (0.073) -0.021 (0.122)RET*Firm size 0.001 (0.551) -0.001 (0.730)D*Firm size -0.007 (0.260) -0.012 (0.054)RET*D*Firm size -0.090 (0.000) -0.118 (0.000)Firm size 0.012 (0.000) 0.013 (0.000)RET*Cross-Industry 0.001 (0.775)D*Cross-Industry -0.061 (0.000)RET*D*Cross-Industry -0.293 (0.000)Cross-Industry -0.001 (0.864)RET*Public Target 0.000 (0.949)D*Public Target 0.016 (0.548)RET*D*Public Target 0.094 (0.470)Public Target 0.004 (0.490)RET*Private Target -0.007 (0.091)D*Private Target 0.001 (0.941)RET*D*Private Target 0.077 (0.359)Private Target 0.009 (0.096)RET*Pooling of interest method 0.009 (0.075)D*Pooling of interest method -0.016 (0.612)RET*D*Pooling of interest method -0.278 (0.023)Pooling of interest method 0.008 (0.342)RET*Compete 0.001 (0.965)D*Compete 0.137 (0.100)RET*D*Compete 0.821 (0.126)Compete -0.003 (0.811)RET*Relative size -0.006 (0.267)D*Relative size 0.015 (0.630)RET*D*Relative size 0.106 (0.406)Relative size 0.000 (0.999)RET*Litigation 0.004 (0.368) 0.006 (0.230)D*Litigation 0.049 (0.006) 0.049 (0.009)RET*D*Litigation 0.258 (0.003) 0.178 (0.034)Litigation -0.084 (0.060) -0.100 (0.023)

β6+ β7 =0 0.235 (0.012) 0.250 (0.043)Year fixed effect Yes YesIndustry fixed effect Yes YesObservations 7505 7505

R2 0.284 0.333

30