Review of Accounting Studies

, Volume 18, Issue 4, pp 1050-1087

First online:

Target’s earnings quality and bidders’ takeover decisions

  • Kartik RamanAffiliated withBentley University
  • , Lakshmanan ShivakumarAffiliated withLondon Business School
  • , Ane TamayoAffiliated withLondon School of Economics Email author 

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This study examines how takeover decisions are influenced by the quality of information in target firms’ earnings. We show that bidders prefer negotiated takeovers in deals involving targets with poor earnings quality. Moreover, earnings quality and takeover premiums are negatively related in negotiated takeovers, suggesting that bidders obtain valuable private information through negotiations. We also find that bidders share information risk with target shareholders by paying with more equity for targets with poor earnings quality. These findings are driven primarily by the asymmetric information component of earnings quality (as opposed to the symmetric component) and are observed mainly in inter-industry takeovers, where asymmetric information concerns are greater, rather than in intra-industry takeovers. We conclude that targets’ earnings quality affects bidders’ takeover decisions, particularly in cases of large asymmetric information between targets and bidders.


Takeovers Earnings quality Asymmetric uncertainty Negotiation Bid premium Stock payment

JEL Classification

G34 M41