Before completing merger and acquisition (M&A) transactions, acquiring firms conduct due diligence. This process provides acquiring firms with a more informed assessment of the expected costs, benefits, and risks of an acquisition and offers one last opportunity to renegotiate or terminate an M&A transaction. However, acquiring firms must trade off the costs and benefits of performing additional due diligence versus completing the acquisition. Based on an analysis of the time to negotiate the acquisition agreement and complete the transaction, I predict and find that competitive pressures, short‐term financial reporting incentives, and agency problems are associated with less due diligence. I also find that less due diligence is associated with lower post‐acquisition profitability, a higher probability of acquisition‐related goodwill impairments, and lower quality fair value estimates for the acquired assets and liabilities. These findings highlight due diligence as an important factor explaining cross‐sectional variation in post‐acquisition performance and financial reporting for business combinations.

This study investigates the role of financial reporting quality in merger and acquisition (M&A) deals that are ultimately terminated (i.e., go bust). If a target is a U.S. publicly traded company, an acquirer’s initial assessment of the potential benefits associated with the acquisition of the company is based on publicly available information. Generally, the acquirer obtains limited private information from the target prior to announcing the deal, but engages in transactional due diligence after signing the acquisition agreement to affirm that the financial reporting warranties made by the target are accurate. We construct a low‐quality financial reporting score based on measures prior research identifies as being associated with less reliable, less relevant, and less precise financial reporting. We find that acquirers offer higher premiums for targets with low‐quality financial reporting. However, we also find that low‐quality financial reporting increases the likelihood of deal renegotiation, and contributes to the probability of deals going bust. We document that failed targets are more likely to restate their financial statements after the announcement of the deal, supporting our conjecture that low‐quality financial reporting contributes to deals being terminated. Our research develops a new measure of low‐quality financial reporting, documents that the measure is related to M&A deal outcomes and financial restatements, and provides insights into the consequences of M&A transactional due diligence.

This research evaluates whether reporting incentives and consequences change under the new lease accounting standard. Under prior guidance (SFAS 13), we predict and find firms with high financing cost sensitivities to leverage have greater incentive to finance investments with operating leases. Under the new lease accounting standard (ASU 2016-02), we predict and find this leverage incentive remains but is reduced, consistent with the FASB’s objective to limit opportunities to structure lease contracts for balance sheet purposes. Under ASU 2016-02, we also predict and find that the leverage incentive encourages firms to reduce operating lease liabilities by decreasing the duration of minimum lease payments. Lastly, we predict and find that firms use fewer operating leases under both SFAS 13 and ASU 2016-02 when managers’ income objectives exclude depreciation and/or interest expense. These findings suggest reporting incentives remain post ASU 2016-02 that encourage firms to structure leases to achieve accounting outcomes. Data Availability: This study uses licensed data from a variety of sources (see Appendix A for a detailed list of providers).

Under U.S. GAAP, firms recognize assets acquired in business combinations at fair value. Similarly, in taxable asset acquisitions firms adjust the tax basis of assets to fair value. Managers can increase the present value of future tax savings by allocating a greater portion of the purchase price to shorter‐lived assets than to goodwill or indefinite‐lived intangibles. However, this tax planning strategy imposes a financial reporting cost because it reduces book income following the acquisition; all else equal, allocations to shorter‐lived depreciable assets increase book depreciation expense, whereas allocations to goodwill and indefinite‐lived intangibles do not increase book amortization expense. We exploit the features of taxable asset acquisitions to investigate trade‐offs between tax and financial reporting incentives. We predict and find greater allocations to depreciable versus intangible assets when managers have strong tax incentives and weak financial reporting incentives. However, we also find that strong financial reporting incentives moderate the effects of strong tax incentives. These findings contribute new evidence to the literature on the importance of nontax costs in tax planning decisions