Does Regulatory Monitoring Improve M&A Outcomes? Evidence from Chinese Comment Letters

Abstract

This study examines the importance of enforcing acquisition disclosure regulation on price reactions to M&A announcements. Using a novel sample of regulatory comment letters on acquisition filings by public companies in China, we document that acquisitions targeted by the regulator have lower bidder announcement returns and the effect is greater when the comment letters have more acquisition-specific comments, compared to those on general accounting and governance issues. Transactions with M&A comment letters are lower quality transactions obfuscated by weaker disclosure evidenced by a lower likelihood of the deal closing, and if the deal does close, lower post-deal firm profitability and a greater likelihood of subsequent goodwill impairment. The results highlight that regulatory enforcement of acquisition disclosures is useful to investors.