How has the international harmonization of financial reporting standards affected merger premiums within the European Union? ☆ Konstantinos Bozos a,b, ⁎, Yasanji C. Ratnaike c , Malek Alsharairi d a Leeds University Business School, Leeds, UK b CIBER, Georgia State University, Atlanta, GA, USA c Citi, Equity Derivatives – MTNs, London, UK d German Jordanian University, Amman, Jordan abstract article info Article history: Received 13 April 2013 Received in revised form 19 September 2013 Accepted 20 September 2013 Available online 2 October 2013 Keywords: Merger premiums IFRS Mandatory adoption Absence of IFRS We investigate the impact of IFRS adoption on merger premiums. Using a comprehensive database of M&A deals within the EU during 2000–2011 we examine the role of overall IFRS adoption, the differences between voluntary and mandatory adopters and the role of the target country's pre-IFRS accounting infrastructure and framework (absence of IFRS and IAS). We find that the introduction of the mandate is generally associated with lower merger premiums paid to targets. This decline is more pronounced in deals where the targets are mandatory adopters. We also find that the further away the target's country standards are from IFRS, the stronger the effect of IFRS adoption is on merger premiums. The results are robust to an exhaustive number of control variables and alter- native model specifications, as well as across different subsamples. © 2013 Elsevier Inc. All rights reserved. 1. Introduction There has been a substantial growth in global merger and acquisition (M&A) activity from under $20 billion in 1967 to $2.4 trillion by 2010 with much of the growth occurring in the form of M&A waves. The extant literature on the fifth merger wave, which spanned from 1993 to 2000, is of particular interest given that the majority of M&A deals during this period were characterised by significant overvaluation and overpayment by the acquiring firms (Andrade, Mitchell, & Stafford, 2001). Towards its end however there were significant changes in terms of the general macro and microeconomic environments with key advancements regarding corporate governance and capital market structures. All of these influences in turn are believed to have affected M&A activity as well as the diversity in the valuations between acquirers and targets within the sixth merger wave, which occurred from 2003 to 2007 (Alexandridis, Mavrovitis, & Travlos, 2012). One of the most significant developments, which occurred after the fifth merger wave within the European Union, was the international harmonization of financial reporting standards whereby, following EU Regulation no.1606/2002, all EU listed firms were required to adopt the International Financial Reporting Standards (IFRS). 1 With the afore- mentioned regulation becoming effective from the 1st of January 2005, a widespread convergence from country specific Generally Accepted Accounting Principles (GAAP) to IFRS was noticeable, with more than 7000 EU firms adopting the new standards. This has stimulated discus- sion on the perceived theoretical impact of IFRS on firm valuations and the subsequent effects on M&A premiums. Given the remit of the IFRS (see Section 2.1), it was widely expected that a single set of accounting rules would eliminate international differences in financial accounting standards and enhance comparability (Ball, 2006). This was expected to reduce information asymmetries and uncertainty in take over deci- sions within M&A transactions, which in turn would be reflected upon M&A premiums (e.g. Zhu & Jog, 2009). While empirical studies have in- vestigated the effect of these changes on a number of reporting indica- tors (for a review see Brown, 2011) and the consequences of divergence from country-specific standards to IFRS within the EU (Ding, Hope, Jeanjean, & Stolowy, 2007), there has been no examination of the direct link between the adoption of IFRS and M&A premiums. This is unfortu- nate, given the number of channels through which the newly adopted accounting standards could influence the latter and consequently shape the nature and volume of future M&A activity. More importantly, given the on-going IFRS–GAAP convergence project within the US, there is a strong case to be made on the importance of examining the link International Review of Financial Analysis 31 (2014) 48–60 ☆ We wish to thank Brian M. Lucey (the editor) and one anonymous reviewer for their very helpful comments and suggestions and the participants of the 2013 Academy of International Business meeting and the 21st Conference of the Multinational Finance Society for helpful comments or discussion. The views herein are those of the authors and do not necessarily reflect the views of Citibank or it's constituents. ⁎ Corresponding author at: Leeds University Business School, University of Leeds, Maurice Keyworth Building, Leeds, LS2 9JT, UK. E-mail address: kb@lubs.leeds.ac.uk (K. Bozos). 1 See Soderstrom and Sun (2007), Pope and McLeay (2011) and Brüggemann et al. (2013) for a comprehensive discussion on the motivation for IFRS adoption. 1057-5219/$ – see front matter © 2013 Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.irfa.2013.09.004 Contents lists available at ScienceDirect International Review of Financial Analysis