IFRS harmonization and cross-country M&A performance

This study investigates the effect of International Financial Reporting Standards (IFRS) harmonization on bidder’s M&A profitability. We assume that the usage of a similar business language amongst countries will reduce the costs and errors on identifying profitable investments in foreign countries and thus lead positive market reaction to M&A announcements. We further predict that the positive association between accounting standard convergence and M&A profitability extends to post acquisition performance. Using a sample of cross-country mergers and acquisitions from the period of 2001-2016, we find that the threeday cumulative abnormal return (3-day CAR) and change in return on assets (∆ROA) are greater for M&A deals made after the period when both the bidder’s country and target’s country adopt mandatory IFRS. Further, we document that this positive association between IFRS harmonization and M&A profitability is pronounced when the bidder’s market is developed. In other words, even if IFRS conciliation facilitates the bidder on identifying a profitable project, if the bidder domiciles in less-developed market, then investors do not react positively to the M&A news. This implies that the positive effect of IFRS harmonization is not realized by unification itself, but should be combined with market supporting institutions.