1 Introduction
2 Interviews with private firm M&A experts and hypothesis development
2.1 Interviews with private firm M&A experts
2.1.1 Overview
2.1.2 Importance of financial statement information for private firm valuations
2.1.3 Use of financial statement multiples in the valuation of private firms
2.1.4 Multiples based on current market prices versus prices from past private firm transactions
2.1.5 Local GAAP standards versus IFRS, comparability, and adjustments to financial statements
2.1.6 Peer groups and the usefulness and applicability of peer multiples
2.2 Hypothesis development
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Hypothesis 1 – The value relevance of private firms’ reported financial information does not depend on the level of accounting comparability between private and public firms.
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Hypothesis 2 – The impact of accounting comparability between private and public firms on the value relevance of private firms’ reported financial information does not depend on the precision of the valuation signal from public firms.
3 Research design and data
3.1 Measuring the value relevance of financial reports
3.2 Comparing value relevance across different samples
3.3 Discussion of value relevance versus valuation levels
3.4 Sample selection and descriptives
Completed M&A transactions in the EU on Zephyr, 1997–2017 | 370,726 | |
Less: Unknown stake acquired | (100,512) | |
Less: Missing transaction value | (130,450) | |
Less: Missing target identifier | (4,826) | |
Less: No match with financial data from Orbis | (27,678) | |
Less: No time series data on public/private status available | (1,480) | |
Less: Missing variables | (16,800) | |
Less: Negative equity | (4,808) | |
Less: Ownership change <1% | (32,853) | |
Less: Duplicate transactions per firm-year | (16,471) | |
Less: Extreme values (MTB, ROA, Size) | (1,821) | |
Final sample | 32,914 | |
of which: | ||
Public firm target M&A transactions | 18,497 | |
Private firm target M&A transactions | 14,417 |
Panel A. Public firms versus private firms | |||||||||||||
Public firms | Private firms | ||||||||||||
Variable | N | Mean | Std. Dev. | p25 | p50 | p75 | Variable | N | Mean | Std. Dev. | p25 | p50 | p75 |
VALUE | 18,497 | 901.2 | 2,189.8 | 20.2 | 100.2 | 543.7 | VALUE | 14,417 | 355.8 | 1,184.7 | 10.7 | 41.1 | 183.8 |
EQUITY | 18,497 | 482.9 | 1,189.3 | 11.4 | 56.3 | 287.2 | EQUITY | 14,417 | 146.5 | 579.7 | 3.0 | 12.5 | 58.6 |
EARN | 18,497 | 39.4 | 147.6 | −1.6 | 1.5 | 20.7 | EARN | 14,417 | 10.7 | 72.2 | −0.1 | 0.9 | 5.1 |
SIZE | 18,497 | 1,676.3 | 4,831.7 | 22.2 | 117.1 | 750.7 | SIZE | 14,417 | 518.4 | 2,424.7 | 9.2 | 35.5 | 165.8 |
LOSS | 18,497 | 0.375 | 0.5 | 0.0 | 0.0 | 1.0 | LOSS | 14,417 | 0.269 | 0.4 | 0.0 | 0.0 | 1.0 |
IFRS | 18,497 | 0.674 | 0.5 | 0.0 | 1.0 | 1.0 | IFRS | 14,417 | 0.124 | 0.3 | 0.0 | 0.0 | 0.0 |
LEVRAT | 18,497 | 0.491 | 0.251 | 0.3 | 0.5 | 0.7 | LEVRAT | 14,417 | 0.578 | 0.242 | 0.4 | 0.6 | 0.8 |
Panel B. Private firms using local GAAP versus private firms using IFRS | |||||||||||||
Private firms using local GAAP | Private firms using IFRS | ||||||||||||
Variable | N | Mean | Std. Dev. | p25 | p50 | p75 | Variable | N | Mean | Std. Dev. | p25 | p50 | p75 |
VALUE | 12,632 | 262.6 | 771.3 | 9.6 | 36.0 | 149.9 | VALUE | 1,785 | 730.7 | 1,459.8 | 31.3 | 140.0 | 597.0 |
EQUITY | 12,632 | 95.8 | 319.2 | 2.6 | 9.9 | 43.2 | EQUITY | 1,785 | 332.4 | 669.7 | 18.3 | 67.4 | 265.4 |
EARN | 12,632 | 7.5 | 40.3 | −0.0 | 0.8 | 4.3 | EARN | 1,785 | 19.9 | 77.6 | −2.1 | 2.2 | 19.1 |
SIZE | 12,632 | 291.2 | 1,051.4 | 8.1 | 28.9 | 123.2 | SIZE | 1,785 | 1,227.7 | 2,550.9 | 44.2 | 178.8 | 847.6 |
LOSS | 12,632 | 0.261 | 0.4 | 0.0 | 0.0 | 1.0 | LOSS | 1,785 | 0.329 | 0.5 | 0.0 | 0.0 | 1.0 |
LEVRAT | 12,632 | 0.578 | 0.241 | 0.4 | 0.6 | 0.8 | LEVRAT | 1,785 | 0.579 | 0.249 | 0.4 | 0.6 | 0.8 |
3.5 Value relevance of public versus private firms’ financial reporting
Model | Baseline | Matched sample | Deflated |
---|---|---|---|
(1) | (2) | (3) | |
(a) adj. R2 public firms | 77.1 | 76.2 | 46.2 |
(b) adj. R2 private firms | 66.0 | 70.7 | 35.9 |
Diff. [(b) - (a)] | −11.9*** | −5.5*** | −10.3*** |
N (public firms) | 18,497 | 13,028 | 18,497 |
N (private firms) | 14,417 | 13,028 | 14,417 |
4 Empirical tests and findings
4.1 Accounting comparability and value relevance
Model | Baseline | Matched sample | Deflated |
---|---|---|---|
(1) | (2) | (3) | |
(a) adj. R2 Local GAAP firms | 67.8 | 65.2 | 35.6 |
(b) adj. R2 IFRS firms | 76.1 | 73.3 | 43.7 |
Diff. [(b) - (a)] | 8.3* | 8.1* | 8.1*** |
N (Local GAAP firms) | 12,632 | 1,755 | 12,632 |
N (IFRS firms) | 1,785 | 1,755 | 1,785 |
Model | Baseline | Matched sample | Deflated |
---|---|---|---|
(1) | (2) | (3) | |
(a) adj. R2 pre 2005 | 73.2 | 70.3 | 39.3 |
(b) adj. R2 post 2005 | 66.0 | 66.5 | 34.4 |
Diff. [(b) - (a)] | −7.2*** | −3.8 | −4.9*** |
N (pre 2005) | 4,904 | 4,869 | 4,904 |
N (post 2005) | 7,728 | 4,869 | 7,728 |
Model | Baseline | Matched sample | Deflated |
---|---|---|---|
(1) | (2) | (3) | |
(a) adj. R2 UK GAAP firms, pre 2005 | 72.9 | 61.2 | 43.9 |
(b) adj. R2 UK GAAP firms, post 2005 | 64.8 | 64.4 | 37.4 |
Diff. [(b) - (a)] | - 8.1 | 3.2 | −6.5 |
(c) adj. R2 IFRS firms, post 2005 | 77.9 | 74.0 | 48.1 |
Diff. [(c) - (a)] | 5.0 | 12.8 | 4.2 |
Difference in the post-period [(c) - (b)] | 13.1* | 9.6 | 10.7*** |
N (UK GAAP firms, pre 2005) | 2,539 | 519 | 2,539 |
N (UK GAAP firms, post 2005) | 2,539 | 519 | 2,539 |
N (IFRS firms, post 2005) | 563 | 519 | 563 |
4.2 The precision of public peer information and value relevance
Model | Baseline | Matched sample | Deflated |
---|---|---|---|
(1) | (2) | (3) | |
Panel A. Above-the-median number of public country-industry peers | |||
(a) adj. R2 Local GAAP firms | 65.5 | 62.3 | 31.8 |
(b) adj. R2 IFRS firms | 80.8 | 76.9 | 43.7 |
Diff. [(b) - (a)] | 15.3*** | 14.6** | 11.9*** |
N (Local GAAP firms) | 4,021 | 884 | 4,021 |
N (IFRS firms) | 930 | 884 | 930 |
Panel B. Below-the-median number of public country-industry peers | |||
(a) adj. R2 Local GAAP firms | 66.2 | 67.0 | 34.5 |
(b) adj. R2 IFRS firms | 71.8 | 71.0 | 42.1 |
Diff. [(b) - (a)] | 5.6 | 4.0 | 7.6*** |
N (Local GAAP firms) | 3,707 | 809 | 3,707 |
N (IFRS firms) | 855 | 809 | 855 |
Panel C. Difference in differences | |||
Difference in differences (A – B) | 9.7+ (15.3–5.6) | 10.6 (14.6–4.0) | 4.3+ (11.9–7.6) |
5 Additional analyses
5.1 Determinants of comparability and information spillovers
Panel A. Partial R2 of major financial statement components | |||
Local GAAP (N = 2,223) | IFRS (N = 471) | ||
(1) | (2) | ||
Assets | |||
INTANGIBLE FIXED ASSETS | 2.0 | 4.2 | |
TANGIBLE FIXED ASSETS | 5.2 | 8.0 | |
OTHER FIXED ASSETS | 7.1 | 4.3 | |
CASH | 4.6 | 6.6 | |
OTHER CURRENT ASSETS | 6.1 | 6.1 | |
Total | 25.0 | 29.2 | |
Diff. [(2)–(1)] | 4.2 | ||
Liabilities | |||
CURRENT LIABILITES | 9.1 | 11.6 | |
NON CURRENT LIABILITIES | 9.8 | 13.7 | |
Total | 18.9 | 25.3 | |
Diff. [(2)–(1)] | 6.4* | ||
Income Statement | |||
REVENUES | 13.8 | 13.7 | |
EXPENSES | 12.4 | 12.8 | |
Total | 26.2 | 26.5 | |
Diff. [(2)–(1)] | 0.3 | ||
Total R2 | 70.1 | 81.0 | |
Diff. [(2)–(1)] | 10.9+ | ||
Panel B. Local GAAP versus IFRS: Restructuring | |||
Baseline | Matched sample | Deflated | |
(1) | (2) | (3) | |
(a) Diff. IFRS / L. GAAP: Non-turnaround targets | 7.7+ | 5.7 | 7.4*** |
(b) Diff. IFRS / L. GAAP: Turnaround targets | −3.1 | 24.5 | −2.9 |
Difference in differences [(a) - (b)] | 10.8*** | −18.8 | 10.3*** |
N (Non-turnaround targets) | 12,245 | 2,858 | 12,245 |
N (Turnaround targets) | 2,172 | 648 | 2,172 |
5.2 Self-selection and endogeneity
5.2.1 Overview
5.2.2 Variation across countries and industries
Panel A. Local GAAP vs. IFRS | ||||||||||
Interacted Model - Eq. (2) | Baseline | Matched sample | Deflated | |||||||
(1) | (2) | (3) | ||||||||
(a) adj. R2 Local GAAP firms | 73.6 | 74.5 | 36.1 | |||||||
(b) adj. R2 IFRS firms | 83.2 | 82.2 | 47.2 | |||||||
Diff [(b) - (a)] | 9.6+ | 7.7** | 11.1*** | |||||||
N (Local GAAP firms) | 12,632 | 1,755 | 12,632 | |||||||
N (IFRS firms) | 1,785 | 1,755 | 1,785 | |||||||
Panel B. Differences in adj. R2 between IFRS and local GAAP: Number of public peer firms | ||||||||||
Interacted Model - Eq. (2) | Baseline | Matched sample | Deflated | |||||||
(1) | (2) | (3) | ||||||||
(a) Diff. if number of peers above the median | 12.9*** | 11.1** | 11.6*** | |||||||
(b) Diff. if number of peers below the median | 5.2 | 4.0 | 9.3 | |||||||
Difference in differences [(a) - (b)] | 7.7+ | 7.1 | 2.3 | |||||||
Panel C. Differences in adj. R2 between IFRS and local GAAP: Country-level regressions | ||||||||||
Country | BE | DE | ES | FI | FR | GB | IT | PL | NL | SE |
(1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | (9) | (10) | |
(a) Diff., Baseline | 11.3 | 18.7+ | 6.8 | 14.2 | 19.0 | 9.0 | 7.1 | −40.6*** | −1.7 | −13.2 |
(b) Diff., Deflated | 4.2 | 18.7*** | 20.9** | 19.6* | 26.9* | 7.8** | 6.7 | −3.0 | 34.0* | 1.6 |
N (Local GAAP firms) | 5pt?>363 | 459 | 1,279 | 413 | 1,395 | 5,078 | 460 | 729 | 278 | 769 |
N (IFRS firms) | 33 | 131 | 179 | 25 | 90 | 563 | 210 | 149 | 35 | 75 |
5.2.3 Further analyses of differences in the variation of expected growth and risk
Panel A. Comparison of realized growth and risk across local GAAP and IFRS firms | |||
Estimation period: | t / t-2 | t / t-3 | t / t-4 |
(1) | (2) | (3) | |
(a) sd(GROWTH) Local GAAP firms | 0.161 | 0.170 | 0.176 |
(b) sd(GROWTH) IFRS firms | 0.163 | 0.177 | 0.185 |
Difference [(a) - (b)] | −0.002 | −0.007* | −0.009** |
N (Local GAAP firms) | 10,592 | 9,580 | 8,553 |
N (IFRS firms) | 1,445 | 1,323 | 1,203 |
(c) sd(RISK) Local GAAP firms | 0.103 | 0.108 | 0.118 |
(d) sd(RISK) IFRS firms | 0.106 | 0.111 | 0.121 |
Difference [(c) - (d)] | −0.003 | −0.003 | −0.003 |
N (Local GAAP firms) | 10,458 | 9,263 | 8,050 |
N (IFRS firms) | 1,422 | 1,277 | 1,124 |
Panel B. Matching on realized growth and risk | |||
Matched on: | GROWTH | RISK | |
(1) | (2) | ||
(a) adj. R2 Local GAAP firms | 62.1 | 57.4 | |
(b) adj. R2 IFRS firms | 78.4 | 74.0 | |
Difference [(b) - (a)] | 16.3** | 16.6** | |
N (Local GAAP firms) | 746 | 1,277 | |
N (IFRS firms) | 746 | 1,277 |