Investigating the relationship between bank performance and accounting standards: evidence from M&amp;As in European banking

Ali İhsan Akgün

doi:10.1108/jcms-10-2021-0032

Abstract

PurposeThe study aims to identify whether international financial reporting standards (IFRS) or local generally accepted accounting principles (GAAP) reporting provides investors and senior management of acquirer banks with superior information on target banks under post-merger bank performance.Design/methodology/approachThe authors examine the claim that IFRS improves corporate transparency and increases financial reporting quality in European Bank merger and acquisitions (M&As). The authors compare the financial performance of merged banks where the target and acquirer banks employed the same reporting system (up to 305 merged banks) to the performance of a control group of banks not engaged in M&A activity (up to 1,690 European banks).FindingsLocal GAAP reporting allows a more transparent assessment of financial performance using traditional indicators, making it a superior tool for assessing potential acquisition targets.Practical implicationsOverall, the empirical findings are consistent with prior studies and indicate a significant relationship between local GAAP and post-merger performance, while IFRS does not contribute to post-merger bank performance.Originality/valueThe study is one of the very few studies to investigate the relationship between bank performance, M&A activity and accounting standards in EU-28 countries. The primary contribution the finding of poor performance of IFRS reporting merged banks compared to local GAAP banks in EU-28 countries in line with prior results of Huian (2012). In addition, several deal- and bank-specific characteristics that affect accounting standards influence M&A transactions in European banks.

Highlights

The IASB (2010) manages and advocates international financial reporting standards (IFRS) as a set of high-quality accounting rules that public companies globally should be apply. Carmona and Trombetta (2008) state that IFRS rules are principles-based and encourage firms to report accounting information that better reflects the underlying corporate economic activities
Our study aims to address this question by analyzing how the effects of merger and acquisitions (M&As) differ under local generally accepted accounting principles (GAAP) or IFRS and the factors that may account for pre- and postmerger effects that vary with the location of international bidders and targets
We examine this claim in the context of European bank M&As – whether IFRS or local GAAP reporting provided superior information on target banks to investors and the senior management of acquirer banks as indicated by post-merger bank performance

Summary

Introduction

The IASB (2010) manages and advocates IFRS as a set of high-quality accounting rules that public companies globally should be apply. Carmona and Trombetta (2008) state that IFRS rules are principles-based and encourage firms to report accounting information that better reflects the underlying corporate economic activities. The IASB (2010) manages and advocates IFRS as a set of high-quality accounting rules that public companies globally should be apply. Carmona and Trombetta (2008) state that IFRS rules are principles-based and encourage firms to report accounting information that better reflects the underlying corporate economic activities. European Commission regulators claim that IFRS improves corporate transparency, increases financial reporting quality and enhances the comparability of financial statements, making them more capital-market oriented and comprehensive with respect to disclosure requirements [1]. Accounting and financial information based on IFRS potentially reduces information asymmetry between insiders and investors and among investors, leading to positive capital market. The full terms of this license may be seen at http://creativecommons.org/licences/by/4.0/legalcode

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