International M&A Laws, Market for Corporate Control, and Accounting Conservatism

This paper exploits the staggered initiation of merger and acquisition (M&A) laws across countries to examine the effect of an open market for corporate control on accounting conservatism. Using a global sample of firms across 34 countries, we find an increase in accounting conservatism following the enactment of M&A laws. Cross-sectionally, we find that the increase in conservatism is greater in countries with weak institutional infrastructure and in countries where M&A law enactments spur large growth in overall takeover activity. We further find that the effect of M&A laws on conservatism is more pronounced when firms have greater external financing needs and when firms borrow more in the post-enactment period. Overall, our findings highlight the importance of the market for corporate control in shaping financial reporting outcomes.