Review of Accounting Studies

, Volume 18, Issue 4, pp 1050–1087

Target’s earnings quality and bidders’ takeover decisions


DOI: 10.1007/s11142-013-9224-0

Cite this article as:
Raman, K., Shivakumar, L. & Tamayo, A. Rev Account Stud (2013) 18: 1050. doi:10.1007/s11142-013-9224-0


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.


TakeoversEarnings qualityAsymmetric uncertaintyNegotiationBid premiumStock payment

JEL Classification


Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  • Kartik Raman
    • 1
  • Lakshmanan Shivakumar
    • 2
  • Ane Tamayo
    • 3
  1. 1.Bentley UniversityWalthamUSA
  2. 2.London Business SchoolLondonUK
  3. 3.London School of EconomicsLondonUK