The impact of securities regulation on the information environment around stock-financed acquisitions

Abstract

We investigate the effects of securities regulation, enacted by the European Union (EU) (namely, the Transparency Directive - TPD) to improve the quality of financial reporting and disclosure, on the information environment around stock-financed acquisition announcements. EU directives comprised in the Financial Services Action Plan aim to improve the information quality that flows to investors, which may help reduce the adverse selection discount when stock is used as the method of payment in Mergers and Acquisitions (M&As). We use a difference-in-differences methodology and document a significant increase in announcement returns of stock-paid acquisitions by European acquirers after the change in regulation. We also find that this result accrues essentially to companies with better firm-specific information quality and companies domiciled in EU countries with better institutional quality and shareholder protection. Our results highlight how the impact of the same regulation may differ depending on country and firm-level attributes associated with the information environment.