Made 2-The Economic Consequences of Financial Restatements Evidence From The Market For Corporate Control

THE ACCOUNTING REVIEW
Vol. 90, No. 1

2015
pp. 129
American Accounting Association

DOI: 10.2308/accr-50869
The Economic Consequences of Financial

Restatements: Evidence from the Market for
Corporate Control
Amir Amel-Zadeh
University of Cambridge
Yuan Zhang
The University of Texas at Dallas
ABSTRACT: This paper investigates whether and how financial restatements affect the
market for corporate control. We show that firms that recently filed financial restatements
are significantly less likely to become takeover targets than a propensity score matched
sample of non-restating firms. For those restating firms that do receive takeover bids, the
bids are more likely to be withdrawn or take longer to complete than those made to nonrestating firms. Finally, there is some evidence that deal value multiples are significantly
lower for restating targets than for non-restating targets. Our analyses suggest that the
information risk associated with restating firms is the main driver of these results.
Overall, this study finds that financial restatements have profound consequences for the
allocation of economic resources in the market for corporate control.
Keywords: nancial restatements; market for corporate control; mergers and acquisitions; information risk; corporate governance.
JEL Classications: D82; G14; G34; M41.
Data Availability: Data are available from sources identied in the paper.
I. INTRODUCTION
his paper investigates whether and how financial restatements affect the market for
corporate control. Prior evidence suggests that financial restatements are associated with
significant economic consequences. A large literature examines the capital market effects of
We appreciate helpful comments from John Harry Evans III (senior editor), Bin Ke (editor), and two anonymous
reviewers. We also thank John Core, Wei Jiang, Sarah McVay, Geoff Meeks, Raghu Rau, seminar participants at
Columbia University, The Ohio State University, University of California, Irvine, University of Cambridge, University
of Illinois at UrbanaChampaign, The University of Texas at Dallas, and conference participants at the 2011 American
Accounting Association Annual Meeting for helpful comments and suggestions. All errors are our own.
Editors note: Accepted by Bin Ke.
Submitted: June 2012

Accepted: June 2014
Published Online: July 2014
Amel-Zadeh and Zhang
financial restatements (Anderson and Yohn 2002; Hribar and Jenkins 2004; Palmrose, Richardson,
and Scholz 2004), their consequences for labor markets (Srinivasan 2005; Desai, Hogan, and
Wilkins 2006b; Kedia and Philippon 2009), and the associated legal costs (Palmrose and Scholz
2004; Karpoff, Lee, and Martin 2008). Yet, little research has examined the consequences for the
market for corporate control.
Why might financial restatements have an effect on the takeover market? The market for
corporate control exerts a disciplinary role in firm management because it establishes powerful
incentives for outsiders to intervene with takeover offers for inefficiently managed firms in order to
eliminate mismanagement and increase shareholder value (Manne 1965; Jensen and Ruback 1983).
In theory, continued underperformance of a firm in the capital market should serve as a signal of
mismanagement, offering profit opportunities for potential acquirers. However, empirical studies
have produced mixed results on the link between market prices and takeovers (Agrawal and Jaffe
2003; Edmans, Goldstein, and Jiang 2012). Moreover, to the extent that inferior financial
performance is disguised through misstatement of earnings, inefficiencies are less likely to be
detected by the market.
Restatement filings may, therefore, serve as visible signals of corporate governance failures and
ineffective internal control that otherwise would be difficult for outsiders to detect (AshbaughSkaife, Collins, and Kinney 2007). In addition, because financial restatements are, on average,
associated with significantly negative stock returns, both around the announcements and in the
medium to long term (Anderson and Yohn 2002; Palmrose et al. 2004), potential bidders may
conclude that these firms can be acquired at relatively low prices. Thus, acquirers would have an
incentive to take control of these firms to restore them to their potential. Accordingly, restating
firms might be more likely to become takeover targets in the market for corporate control
subsequent to their restatements.
On the other hand, financial restatements might also lead to a lower likelihood of receiving a
takeover offer. Financial statements play a pivotal role in the effective monitoring of managerial
action and the efficient allocation of financial resources (Healy and Palepu 2001). Although
restatements are ex post corrections of previous accounting misstatements, announcements of
financial restatements increase information asymmetries between insiders and outsiders
(Bhattacharya, Desai, and Venkataraman 2010), signal high information risk (Kravet and Shevlin
2010) and, therefore, increase the cost of adverse selection. Such information asymmetry is
particularly detrimental to major investment decisions such as takeovers. Potential acquirers have to
rely on publicly available information at the initial stages of the takeover process in determining
whether an offer should be made. They also only obtain very limited inside information once the
confidentiality agreements are signed in preparation for negotiations about the deal terms before the
acquisition is made public.1 Hence, the information risk inherent in restating firms is expected to
decrease the incentives for prospective acquirers to make takeover offers.
Overall, while the lack of effective management and control at restating firms calls for outside
intervention through takeovers, the information risk of these firms might reduce such incentives of
potential acquirers. Whether the costs of the information risk outweigh the potential benefits of a
takeover after financial restatements is an empirical question we investigate in this study.
We seek to provide evidence on the consequences of financial restatements on the likelihood,
the outcome, and the valuation of takeovers. More specifically, our first research question examines
whether firms that file financial restatements are more or less likely to become takeover targets in
the subsequent 12 months than a matched control group of firms that do not restate earnings. Based
on a sample of 1,963 propensity score matched pairs of restating and non-restating firms during
1
See Wangerin (2012) for a more detailed discussion of the due diligence process in mergers and acquisitions.
The Accounting Review

January 2015
Consequences of Financial Restatements: Evidence from the Market for Corporate Control
20012008, we find that restating firms experience a significantly lower likelihood of receiving a
takeover bid than non-restating firms. The propensity score matching technique ensures that our
control group is very similar in their likelihood of being a restating firm based on firm
characteristics identified in the prior literature (Beneish 1999; Dechow, Ge, Larson, and Sloan
2011), except that these firms did not file restatements. In regression analyses, we find that nonrestating firms have, on average, a 5.7 percent likelihood of receiving a takeover bid versus 3.2
percent for their restating counterparts, reflecting an economically and statistically significant 44
percent difference in the takeover likelihood.
We also find that restatements due to both accounting errors and irregularities have a similar
negative impact on the takeover likelihood, suggesting that potential acquirers are broadly
concerned with information uncertainty, regardless of whether this uncertainty is due to
managements intentional misstatements or erroneous application of GAAP. Further analyses
show that our results are not driven by litigation risks, internal control weaknesses, or CEO
turnovers associated with the financial restatements.
Our second research question examines whether takeover bids made to restating targets are
more or less likely to be withdrawn than those made to non-restating targets. We conjecture that
after an initial offer has been made and the deal publicly announced, higher information risk of the
restating targets may increase the likelihood of the offer being withdrawn if the bidders due
diligence exposes adverse information. Our third and final research question investigates whether
prior restatements affect the pricing of takeover targets. The targets firm-specific information plays
an important role in assessing the synergies of an acquisition (Martin and Shalev 2009). The
heightened information risk associated with restating target firms affects their cost of capital, which
is expected to have an adverse effect on acquirers valuations of the targets.
Based on a sample of 2,271 takeover bids made between 2002 and 2009, we find that offers
made to restating targets are significantly more likely to be withdrawn or take longer to complete
than offers made to non-restating targets. Furthermore, our results on offer price multiples provide
some evidence that target firms with previous financial restatements receive lower acquisition
valuations compared with non-restating target firms. The discount ranges between 25 percent and
28 percent, although this effect is not consistently strong across different valuation measures and,
therefore, should be interpreted with caution.
Overall, the results presented in this paper suggest that financial restatements have significant
consequences for the allocation of economic resources in the market for corporate control. These
results add to the recent literature that examines the economic consequences of financial
restatements (Desai et al. 2006b; Hribar and Jenkins 2004; Karpoff et al. 2008; Gleason, Jenkins,
and Johnson 2008; Wilson 2008). We provide evidence of previously undocumented consequences
of financial restatements showing that restating firms are significantly less likely to become
takeover targets. Takeover offers made to restating firms are also more likely to be withdrawn and
have lower deal multiples, consistent with a higher cost of capital for restating firms (Hribar and
Jenkins 2004; Kravet and Shevlin 2010). These results also complement prior research on the
implications of financial restatements for resource allocation and investment decisions. Prior
research documents negative economic effects of restatements on investment decisions of firms that
previously engaged in misstatements (McNichols and Stubben 2008; Kedia and Philippon 2009),
while we focus on investments in firms that previously engaged in misstatements.
Furthermore, this paper also contributes to the corporate finance literature on the characteristics
of takeover targets (Jensen 1988; Mitchell and Lehn 1990; Andrade and Stafford 2004; Gorton,
Kahl, and Rosen 2009) and the determinants of takeover valuations (Eckbo and Langohr 1989;
Officer 2003; Bates and Lemmon 2003). Our results have important implications for firms that
engage in mergers and acquisitions activities, providing insights for target selection and bidding
strategies. For example, because bids made to firms that recently filed financial restatements are
January 2015
more likely to be withdrawn due to adverse selection costs, potential acquirers would benefit from
more diligent information acquisition before making an offer.
Several recent studies (Martin and Shalev 2009; Marquardt and Zur 2013; Skaife and
Wangerin 2013) also examine the implications of other measures of financial information quality
for mergers and acquisitions, without examining how financial information quality affects the
takeover decisions in the first place. We provide empirical analyses on this important question. In
addition, our focus on financial restatements is arguably more likely to capture low information
quality attributable to managerial choices than these studies focus on accruals-based earnings
quality measures. Accruals-based information quality measures are often constructed to capture the
mapping of accruals into cash flows and, thus, are partly attributable to firm fundamentals.
Furthermore, unlike these accruals-based measures, restatements provide a directly observable
signal of low information quality, a characteristic that is useful in practice.
Next, Section II discusses the prior literature on restatements and takeovers and develops our
predictions. Section III describes the sample selection and matching procedure. Sections IVVI
present empirical results and discussions of each of our three research questions. We conclude in
Section VII.
II. RELATED LITERATURE AND PREDICTIONS
The prior literature on financial restatements has shown that firms that restate their earnings
experience significant shareholder losses (Anderson and Yohn 2002; Palmrose et al. 2004), have
higher costs of capital (Hribar and Jenkins 2004), incur substantial fines and reputational costs
(Karpoff et al. 2008), and face a higher likelihood of litigation (Palmrose and Scholz 2004).
Beyond these direct capital market effects, accounting restatements also have important labor
market consequences for the involved managers and directors. Management and directors of firms
that announce restatements face a higher likelihood of being replaced and subsequently face poorer
employment prospects (Srinivasan 2005; Desai et al. 2006b). Moreover, restatements have negative
consequences for aggregate employment and investments in their respective industries (Kedia and
Philippon 2009).
Despite this large body of literature on the effects of restatements on capital and labor markets,
we know of no direct evidence on the consequences of restatements for investment decisions in the
market for corporate control. This study attempts to fill this gap.
Financial Restatements and Takeover Likelihood
Our first research question examines whether firms with recent filings of financial restatements
face a higher or lower likelihood of becoming a takeover target. Firms that engage in aggressive
earnings management and subsequently file financial restatements are associated with ineffective
internal controls (Ashbaugh-Skaife et al. 2007), signaling agency costs. Takeovers are an important
mechanism for mitigating these agency costs through replacement of inefficient management and
the improvement of internal governance (Morck, Shleifer, and Vishny 1989; Shivdasani 1993;
Schwert 2000). Furthermore, the significantly negative stock returns after restatement announcements documented in prior research (Anderson and Yohn 2002; Palmrose et al. 2004; Desai,
Krishnamurthy, and Venkataraman 2006a; Karpoff et al. 2008) can also make the restating firms
attractive takeover targets.2
2
For example, Palmrose et al. (2004) find average abnormal returns of about 9 percent over two days around the
restatement announcements.

January 2015
FIGURE 1
Schematic Diagram of a Friendly Takeover Process after Financial Restatement Filings
This figure sketches the timeline of the general process during takeover negotiations after announcements of financial
restatements, and the extent of the bidders access to information about the target.
However, several other studies argue that financial restatements increase the information
asymmetry between insiders and outsiders (Diamond and Verrecchia 1991; Bhattacharya et al.
2010). Kravet and Shevlin (2010) further show that financial restatements increase information risk,
which may raise the cost of adverse selection in the acquisition process. Figure 1 illustrates that
during the preliminary due diligence, the acquirer must rely exclusively on publicly available
information as the basis for the decision to approach a potential target. Even during negotiations of
the initial deal terms, the acquirer is granted only limited private information from the target
(Wangerin 2012). Therefore, the information risk and uncertainty inherent in restating firms may
reduce potential acquirers incentives to initiate takeovers.
Overall, while poor performance and weak governance of restating firms may provide
incentives for potential acquirers to make takeover offers, their higher information risk and the
greater cost of adverse selection may reduce such incentives. The effect of financial restatements on
the likelihood of a firm to become a takeover target is, thus, an empirical question. These
considerations might also affect takeover outcomes once acquiring firms have decided to launch a
bid, which we discuss next.
Financial Restatements and the Likelihood of Withdrawal of Takeover Bids
Our second research question examines how financial restatements filed in the 12 months prior
to the takeover bid affect the likelihood that the bid will be withdrawn. When the information risk is
high and the credibility of the targets management low, bidders are likely to perform more diligent
analyses of the targets financial statements (Wangerin 2012). The higher information risk of the
restating targets may increase the likelihood of an initial bid being withdrawn, either because the
takeover parties could not agree on the final acquisition price, or because of remaining risks
exposed by the bidders due diligence once the takeover bid is initiated and the acquisition
agreement signed. Despite the binding nature of the acquisition agreement, investigation covenants
and other closing conditions, such as material adverse change clauses or termination clauses in the
agreement, enable the bidder to withdraw if the due diligence fails to confirm the accuracy of the
representations and warranties made by the target (Wangerin 2012; Skaife and Wangerin 2013).
January 2015
Martin and Shalev (2009) and Marquardt and Zur (2013) examine the effects of target firmspecific information and accruals quality, respectively, on takeover outcomes. Both studies find that
the likelihood of withdrawal of an acquisition offer decreases with the targets information quality.
Our research differs from this literature, which examines the effects of financial reporting on
investment decisions conditional on the acquisition decision having been made. In contrast, our first
research question examines whether and how financial reporting quality affects the decision to
make a takeover bid in the first place.
Furthermore, restatements signal low financial reporting quality that can be more reliably
attributed to aggressive accounting or earnings management. In contrast, the financial reporting
quality measures examined in these prior studies are often constructed to capture the mapping of
accruals into cash flows or the ability to predict future earnings. Low financial reporting quality as
measured in these studies could stem from earnings volatility or high growth rather than aggressive
accounting/earnings management alone. Francis, LaFond, Olsson, and Schipper (2005) similarly
suggest that the conventional accruals-based measures of financial reporting quality are related to both
economic fundamentals and management choices, which are expected to have different implications
for potential acquisition decisions. Finally, financial restatements are readily observable signals, in
contrast to accruals-based measures that require estimating regression models.
Financial Restatements and Deal Valuation
Our last research question examines whether acquirers value restating targets differently from
non-restating targets. The offer price reflects the acquirers valuation of the target, as well as
achievable synergies based on knowledge of the target firm obtained from publicly available
financial reports and possibly from private information. The quality of the information is, thus,
pivotal for the pricing of the target.
A number of studies examine the association between the targets information environment and
takeover premiums. For example, Martin and Shalev (2009) and Raman, Shivakumar, and Tamayo
(2013) show that expected synergies are positively correlated to the targets information quality.
However, Martin and Shalev (2009) find that target shareholder returns from an acquisition
decrease with information quality of the target firm. A possible explanation is that the market
corrects previous underpricing of target firms with low information quality upon the
announcements of takeovers. This possibility is particularly relevant for restating firms because
the market might overreact to restatements. Thus, market-based measures of deal value are affected
by not only expected deal synergies, but also other factors such as misvaluation of the target,
probability of bid failure, and competition during acquisitions. Therefore, we choose to follow
Officer (2007) and focus on deal multiples in the form of ratios of offer prices to firm fundamentals,
which more unambiguously reflect bidders decision making.
Our analyses of deal multiples also help shed light on the results in Hribar and Jenkins (2004)
that financial restatements increase the firms cost of capital. Their evidence is consistent with
Easley and OHara (2004) and Lambert, Leuz, and Verrecchia (2007), who show that the quality of
accounting information affects the cost of capital. This suggests that acquirers incorporate a higher
cost of capital in valuing the target and make lower takeover offers.
III. SAMPLE SELECTION
We obtain data on takeover transactions from the Securities Data Corporation (SDC) database.
Consistent with Martin and Shalev (2009), we only consider deals in which the acquirer seeks to
purchase 100 percent of a public target so that the acquirer does not have access to private information
prior to the bid. The restriction to public targets ensures the availability of restatement information and
other financial data. These requirements yield a total of 3,762 takeover bids during 20022009.
January 2015
For the sample period of 20012008,3 we obtain 4,143 financial restatements from Audit
Analytics for firms that are also covered in Compustat.4 Our empirical tests employ two different
samples based on different intersections between the sample of takeover transactions and the
sample of financial restatements. For our first research question addressing the effects of financial
restatement on takeover likelihood, we obtain a propensity score matched sample between restating
and non-restating firms based on estimated propensity scores of reporting material accounting
misstatements. We first collapse our financial restatements to a sample of 3,756 restating firm-years
because some firms had multiple restatements in one year. We then identify all firm-years in
Compustat that filed no financial statements during 20012008. We pool these two samples and use
the filing date of the last financial restatement in the year (the fiscal year-end) as the event date for
the restating (non-restating) firm-years.
For this pooled sample, we estimate a propensity score for reporting material accounting
misstatements based on a modified logistic regression model developed in Dechow et al. (2011). The
Dechow et al. (2011) model focuses on predicting AAERs (Accounting and Auditing Enforcement
Releases by the Securities and Exchange Commission [SEC]), which often lead to financial
restatements. However, AAERs are likely to capture more extreme forms of earnings management
and are also subject to other potential selection biases, as described by Dechow et al. (2011, 18).
Starting with the Dechow et al. (2011) model,5 we add the following additional controls for other firm
characteristics that are likely to differ between restating and non-restating firms: size, leverage, return
on assets, earnings-price ratio, and liquidity (DeFond and Jiambalvo 1994; Dechow and Dichev 2002;
Doyle, Ge, and McVay 2007; Ashbaugh-Skaife, Collins, Kinney, and LaFond 2008; Sun, Yung, and
Rahman 2012).6 For each of our restating firm-years, we identify the non-restating firm in the same
year and industry that has the closest propensity score with less than 0.02 in score difference. This
procedure leads to a final matched sample of 1,963 pairs of restating and non-restating firms with data
available for all required control variables.7 We merge the matched sample with the above takeover
sample of 3,762 deals. If the firm receives a takeover bid within 12 months after the event date, then
we code TAKEOVER as 1, and 0 otherwise. All variables are defined in Appendix A.
Our second and third research questions examine the effects of financial restatements on the
likelihood of takeover withdrawal and on deal valuation. Starting with the sample of 3,762 takeover
transactions, if the firm filed any financial restatements in the 12 months prior to the bid
announcement based on our sample of 4,143 restatements, then we code RESTATE as 1, and 0
otherwise. Our regression analyses for these two research questions are based on 2,271 deals or
smaller samples, depending on the availability of other information required for the specific analyses.8
3
4
Our research design requires a one-year lag between the restatement sample period and the takeover sample period.
About 10 percent of the restatements during our sample period in the Audit Analytics database are income-increasing.
Excluding these restatements in the sample does not affect the inferences of this study.
For space considerations, we refer the readers to Dechow et al. (2011) for the details of their model specification. We
start with their model 3 (Table 7), in which the authors employ financial statement, accruals quality, off-balance
sheet, and market-based variables as determinants of misstatements. A similar model is used in Beneish (1999).
As a robustness check, we also use a simple one-to-one matching procedure by size, industry, and year instead of the
propensity score matching procedure. The results of our analyses remain qualitatively similar.
Our modified model has a concordant rate of 62 percent and a correct prediction rate of 60 percent, comparable to
those reported in Dechow et al. (2011).
We do not use a propensity score matched sample in our deal outcome and valuation analyses because of sample size
limitations. Only 161 restating firms are acquired, and requiring deal values and matching pairs would further reduce
the sample size significantly. For example, we can only get 45 pairs of matching restating and non-restating firms that
have information on the ratio of deal value to EBITDA (earnings before interest, taxes, depreciation, and
amortization). Such a small sample size fails to provide reliable estimates that can offer useful insights. Therefore, we
use the unmatched sample design in these regressions, but control for a comprehensive list of variables, including the
variables used in the propensity score model.

January 2015
IV. FINANCIAL RESTATEMENTS AND TAKEOVER LIKELIHOOD

Research Design and Descriptive Statistics
This section examines how prior financial restatements affect the probability of receiving a
takeover bid. Based on the 1,963 pairs of restating and non-restating firms matched on propensity
scores, our test employs the following regression model:

X
X
bi CONTROLi
yi YEARi e :
ProbTAKEOVER 1 f b0 b1 RESTATE
1
Based on prior literature estimating takeover likelihood, we include controls for firm size,
measured as the log of market value (SIZE) as in Hasbrouck (1985) and Palepu (1986), book-tomarket (BM) as in Dong, Hirshleifer, Richardson, and Teoh (2006), and the earnings-to-price ratio
(EP) as in Garvey, Milbourn, and Xie (2011). We proxy for performance using ROA, calculated as
operating income before depreciation and amortization over total assets (Jensen and Ruback 1983;
Cremers, Nair, and John 2009).
Following Palepu (1986) and Ambrose and Megginson (1992), we control for sales growth
(SGROW) and leverage (LEVERAGE), which are both expected to be negatively associated with
takeover likelihood. We further include tangibility of assets (TANG) and liquidity (LIQUIDITY),
based on Ambrose and Megginson (1992) and Berger and Ofek (1996). We also construct a
growth-resource dummy variable (GRDUMMY) similar to Palepu (1986), which is equal to 1 if the
firm either has low growth, high liquidity, and low leverage, or high growth, low liquidity, and high
leverage, and equal to 0 otherwise, where high and low reflect the respective variable values above
and below the Compustat median in the year. Finally, we control for the percentage of institutional
ownership (INST) as a proxy for effective monitoring (Shleifer and Vishny 1986; Cremers et al.
2009). All of our control variables are measured as of the end of the event year. We include year
dummies in all of our regressions to control for takeover waves (Harford 2005).
Figure 2 plots the frequency of matching pairs in our sample. We observe the highest number
of restatement filings in 2006 and the lowest number in 2001. This figure also plots the time-series
of the percentages of restating and non-restating firms receiving takeover bids in the subsequent
year. In every year, a lower percentage of restating firms than non-restating firms receive takeover
bids.
Table 1 reports descriptive statistics for the control variables used in Model (1) for the restating
and non-restating firms, respectively. All continuous variables are winsorized at the 1st and 99th
percentiles. Table 1 reports no statistically significant differences in means of the control variables
of restating versus non-restating firms, and small differences in medians in earnings-to-price ratio
and return on assets, suggesting covariate balance and effective matching. Overall, Table 1 suggests
that our restating and non-restating sample firms are generally similar, except for the incidence of
restatements.
Empirical Results
Table 2 reports the test results of the effects of filing financial restatements on the likelihood of
receiving a takeover bid. Panel A cross-tabulates the frequency of takeovers for the restating and
non-restating firms and provides univariate tests. Consistent with Figure 2, restating firms are less
likely to receive takeover bids than non-restating firms. Of the 1,963 restating firms, only 75 (3.8
percent) receive takeover offers within 12 months of the event date, compared to 132 (6.7 percent)
of their matched non-restating counterparts. This difference in frequencies is statistically significant
at less than 1 percent level (Chi-square 16.77).
January 2015
FIGURE 2
The Time-Series of Financial Restatements
This figure is based on 1,963 pairs of restating and non-restating firms matched on propensity of financial misstatements
estimated based on a modified Dechow et al. (2011) model. The sample period is 20012008. The figure shows the time
trend of the number of restating firms and percentage of restating and non-restating firms that receive takeover bids in the
next year.
We next examine our research question in more robust multivariate logistic regressions (Model
(1)). The dependent variable is TAKEOVER, which is equal to 1 if the firm received a takeover bid,
and 0 otherwise. Standard errors are clustered at the two-digit SIC industry level, as in all other
regressions in this study. The regression results are reported in Column (1) of Table 2, Panel B.
Consistent with univariate results, the coefficient on RESTATE is significantly negative at 0.60 (p
, 0.01). We estimate the probability of receiving a takeover bid for a restating (non-restating) firm
when RESTATE is set at 1 (0) and all other variables are set at their respective sample averages.
When RESTATE 0, the predicted probability of takeover is 5.7 percent, and when RESTATE 1,
the predicted probability is 3.2 percent. Thus, the marginal effect of RESTATE on takeover
likelihood is 2.5 percent, a 44 percent (2.5 percent/5.7 percent) decrease.9
Consistent with the prior literature, the likelihood of a takeover bid is negatively associated
with sales growth and positively associated with leverage, the growth-resource dummy, and the
percent of institutional holdings. All other control variables are generally insignificant. The R2 of
the regression in Column (1) in Table 2, Panel B is 1.85 percent and is in line with the generally low
9
As discussed in Section II, our focus on financial restatements is different from the earnings quality measure used in
Marquardt and Zur (2013) and Raman et al. (2013). Nevertheless, we also estimate their measure, which follows
Dechow and Dichev (2002), for our sample and find a correlation of 0.06 between RESTATE and their measure,
suggesting that they indeed capture different aspects of financial information quality. In untabulated results, we add
this measure to Model (1) and reestimate the regression. The coefficient on RESTATE remains statistically negative,
while the earnings quality variable is not.

January 2015
10
TABLE 1
Descriptive Statistics of Matched Restating and Non-Restating Sample
Variable
RESTATE 1
SIZE
BM
EP
LEVERAGE
SGROW
LIQUIDITY
TANG
ROA
GRDUMMY
INST
RESTATE 0
SIZE
BM
EP
LEVERAGE
SGROW
LIQUIDITY
TANG
ROA
GRDUMMY
INST
Mean
Median
P25
P75
Std. Dev.
1,963
1,963
1,963
1,963
1,963
1,963
1,963
1,963
1,963
1,963
5.44
0.48
0.22
0.18
0.15
0.34
0.26
0.02
0.35
0.42
5.44
0.45
0.01***
0.11
0.07
0.30
0.18
0.08***
0.00
0.39
4.04
0.24
0.13
0.00
0.04
0.15
0.07
0.00
0.00
0.05
6.81
0.73
0.05
0.28
0.21
0.49
0.39
0.14
1.00
0.75
1.94
1.80
0.97
0.21
0.53
0.22
0.23
0.25
0.48
0.34
1,963
1,963
1,963
1,963
1,963
1,963
1,963
1,963
1,963
1,963
5.55
0.46
0.24
0.18
0.15
0.33
0.27
0.03
0.36
0.44
5.54
0.45
0.03
0.12
0.08
0.28
0.18
0.10
0.00
0.44
3.92
0.25
0.09
0.00
0.02
0.16
0.08
0.02
0.00
0.06
7.11
0.75
0.06
0.28
0.21
0.47
0.41
0.15
1.00
0.77
2.18
2.01
1.36
0.20
0.51
0.22
0.24
0.27
0.48
0.34
*, **, *** Indicate two-sided significance levels of 10 percent, 5 percent, and 1 percent, respectively, for the difference
between the restating firms and the non-restating firms, based on t-tests for means and Wilcoxon tests for medians.
This table is based on 1,963 pairs of restating and non-restating firms matched on propensity of financial misstatements
estimated based on a modified Dechow et al. (2011) model. The sample period is 20012008. RESTATE equals 1 if the
firm filed financial restatement in the year, and 0 otherwise. All variables are measured at the end of the year of the
restatement filing. All continuous variables are winsorized at 1 percent and 99 percent.
All variables are defined in Appendix A.
explanatory power of tests on acquisition likelihoods (Ambrose and Megginson 1992; Powell
1997).
Different types of restatements may have a different impact on the acquirers perception of the
potential costs and risks involved. During our sample period, we observe two types of restatements that
are less likely to be driven by information risk: those related to leases and stock options backdating. The
Financial Accounting Standards Boards (FASB) clarification on accounting for operating leases in
February 2005 led to a wave of restatements, primarily by industries with significant amounts of leases
on equipment and real estate. These restatements most likely reflect a misunderstanding of the standard
prior to the FASB clarification, as opposed to deliberate attempts to mislead investors. Similarly,
restatements related to stock options backdating might be more related to poor governance of the firm
rather than a signal of poor financial reporting quality and information risk (Collins, Gong, and Li 2009).
We identify 304 firm-years that have restatements related to either leases or stock options
backdating. Column (2) of Table 2, Panel B reports the results of a modified Model (1) with
separate indicators for these types of restatements (LEASE/BACKDATING) and all other
restatements (OTHER). The coefficient for LEASE/BACKDATING is marginally significant at
January 2015

January 2015
RESTATE
LEASE/BACKDATING
OTHER
ERROR
IRREGULARITY
FRAUD
SIZE
BM
EP
LEVERAGE
SGROW
v2
p-value
Total
RESTATE
v2
13.79***
2.18
1.68
2.49
7.27***
9.01***
Coefficient
0.60
0.09
0.05
0.09
0.73
0.59
(1)
All Restatements
Panel B: Logistic Regression Results
Panel A: Univariate Test Results
0.14
0.19
0.11
0.01
0.00
0.00
p-value
16.77***
,0.0001
132
[6.7%]
75
[3.8%]
207
[5.3%]
3,926
1,963
1,963
Total
0.09
0.05
0.09
0.74
0.59
0.42
0.64
2.23
1.68
2.45
7.41***
8.88***
2.77*
12.83***
v2
0.14
0.20
0.12
0.01
0.00
0.10
0.00
p-value
(2)
Lease/Backdating vs. Others
Coefficient
1,831
[93.3%]
1,888
[96.2%]
3,719
[94.7%]
TAKEOVER
Takeover Likelihood
TABLE 2
0.56
0.92
0.10
0.14
0.09
0.27
0.16
0.41
Coefficient
0.00
0.07
0.82
0.03
0.21
0.01
0.81
0.08
p-value
(continued on next page)
9.62***
3.41*
0.05
4.46**
1.61
6.53***
0.06
3.03*
v2
(3)
Nature of Misstatements
11
0.10
0.66
0.09
15.05***
4.79**
52.38***
0.15
0.34
0.11
0.50
0.84
3.23
Yes
3,926
1.85%
LIQUIDITY
TANG
ROA
GRDUMMY
INST
Intercept
Year dummies
Obs.
R2
0.75
0.42
0.76
0.00
0.03
0.00
p-value
Yes
3,926
1.86%
0.15
0.32
0.11
0.50
0.83
3.20
Coefficient
0.10
0.59
0.10
14.96***
4.62**
51.43***
v2
0.75
0.44
0.76
0.00
0.03
0.00
p-value
(2)
Lease/Backdating vs. Others
Yes
1,978
2.04%
0.63
0.53
0.51
0.32
1.13
2.90
Coefficient
0.79
1.00
2.50
3.40*
10.92***
30.25***
v2
0.37
0.32
0.11
0.07
0.00
0.00
p-value
(3)
Nature of Misstatements
*, **, *** Indicate two-sided significance levels of 10 percent, 5 percent, and 1 percent, respectively.
Panel A cross-tabulates frequencies for RESTATE and TAKEOVER and reports the result of the v2 test of differences in the takeover frequencies conditional on restatements. Panel B reports
logistic regression results for the matched sample on the dependent variable TAKEOVER. Column (1) shows the regression results on all restatements, and Column (2) separates the
restatements into those related and unrelated to stock options backdating and lease accounting. Both columns are based on 1,963 pairs of restating and non-restating firms matched on
propensity of financial misstatements estimated based on a modified Dechow et al. (2011) model. Column (3) separates the restatements into errors, irregularities, and frauds based on the 989
pairs of the propensity score matched sample using the GAO restatement data provided by Hennes et al. (2008), as well as the Audit Analytics data. All regressions control for year fixed
effects. All continuous variables are winsorized at 1 percent and 99 percent. All variables are measured at the end of the year of the restatement filing. Standard errors are clustered at the
industry level.
v2
Coefficient
(1)
All Restatements
TABLE 2 (continued)
12

January 2015
13
0.42 (p 0.10). In contrast, the coefficient for OTHER is significantly negative and much higher
in magnitude at 0.64 (p , 0.01). These results are consistent with information risk being one
important driver of the lower likelihood of takeover bids for restating firms.
Financial restatements can be caused by fraud, less serious accounting irregularities such as
intentional aggressive accounting, or simply clerical errors. Ex ante, it is not clear how prospective
acquirers might view these differently. On the one hand, regardless of the motivation of the initial
misstatements, restatements signal unreliable financial information and low earnings quality. On the
other hand, accounting fraud and irregularities might be viewed as more severe than clerical errors,
given that prior research has shown that accounting irregularities have significantly more adverse
effects on the capital market and the CEO/CFO turnover decision than accounting errors (Hennes,
Leone, and Miller 2008).
We use the GAO restatements data provided by Hennes et al. (2008)10 to examine possible
different implications of restatements due to errors and those due to accounting irregularities. To
further identify possible differential effects of accounting frauds, we merge these data with fraud cases
identified from the Audit Analytics database. We apply the same matching procedure as before and
obtain 989 pairs of restating and non-restating firms with all required data available during 2001
2006, among which 756 are classified as errors, 190 as irregularities, and 43 as fraud.11
We first estimate Model (1) based on this alternative sample for comparability and find similar
results as in Column (1) of Table 2, Panel B (not tabulated). Specifically, the coefficient on
RESTATE is 0.57 (p , 0.01). We next modify Model (1) by separating RESTATE into three
indicator variables, ERROR, IRREGULARITY, and FRAUD, and report the results in Column (3) of
Table 2, Panel B. The coefficient on IRREGULARITY (0.92) is larger in magnitude than that on
ERROR (0.56), and both are significantly negative. However, they are not statistically different
from each other. The coefficient on FRAUD, on the other hand, is insignificant, possibly due to lack
of testing power from the infrequent fraud cases.
Overall, to the extent that both accounting irregularities and accounting errors significantly
decrease takeover likelihood, our results suggest that prospective acquirers are concerned about low
accounting quality in general, irrespective of whether the reason for the low quality is due to
intentional misstatements or erroneous application of GAAP. Unreliable accounting numbers
increase information asymmetry and uncertainty, which impedes the acquirers assessment of the
targets value and demotivates them from making acquisition offers.
Additional Analyses
In this subsection, we examine the implications of several alternative factors associated with
financial restatements for acquisition decisions: litigation risk, internal control weaknesses, and
CEO turnover.
Litigation Risk
Financial restatements impose significant litigation risk on the restating firms (Palmrose and
Scholz 2004). Unless an acquisition is structured as an asset purchase, the acquirer generally
10
11
An updated version of the sample of restatements from the Government Accountability Office (GAO) database
differentiated into errors and irregularities is available on Andy Leones webpage at: http://sbaleone.bus.miami.edu/.
We thank Hennes et al. (2008) for making the data publicly available.
Hennes et al. (2008) combine fraud and irregularity cases in their irregularity category, possibly due to the
infrequency of fraud cases, which is also evident in our merged sample. As Hennes et al. (2008) do not separately
identify fraud cases in their sample, it is not clear how many of the fraud cases included in their study overlap with
those included in the Audit Analytics database.

January 2015
14
assumes all existing and contingent liabilities of the target (Reed, Lajoux, and Nesvold 2007) and,
thus, presumably will take the litigation risk of the restating firms into account when considering an
offer.
We estimate whether the litigation risk of the restating firms influences the takeover decision of
a prospective acquirer by splitting our RESTATE variable into two indicator variables, LITI and
NOLITI, which identify, respectively, our sample firms that are and are not subject to litigation
during the period from one year prior to the event date to one year after.12 The litigation data are
obtained from the Securities Class Action Clearinghouse at Stanford University.13
Table 3, Column (1) presents our estimation results. Both LITI and NOLITI have significantly
negative coefficients with similar magnitude (0.58 and 0.60, respectively), suggesting litigation
risk has little incremental explanatory power for acquisition decisions. Thus, litigation risk is less
likely driving our main results, and information risk of the restating firms plays the more important
role in the takeover decision.14
Internal Control Weaknesses
Restating firms often (although not always) have ineffective internal control systems in financial
reporting. Like restatements, internal control weaknesses also signal low financial reporting quality
(Doyle et al. 2007) and weak governance. However, arguably, many internal control weaknesses, such
as lack of segregation of duty, are more likely reflective of governance problems that can potentially be
alleviated by installing a more effective management team after takeovers.
We are able to obtain information from Audit Analytics on the effectiveness of internal
controls based on Section 302 or 404 disclosures as required by the Sarbanes-Oxley Act for 2,884
(1,442 pairs) firm-years in our sample during 20042008. About 48 percent of restating firms report
ineffective internal controls (WEAKIC) compared to 8 percent of non-restating firms. The
correlation between RESTATE and WEAKIC is 0.44, suggesting that internal control weaknesses
potentially represent different underlying firm characteristics than financial restatements.
We add WEAKIC to Model (1) and also interact WEAKIC with RESTATE to examine how
internal control weaknesses affect the effects of financial restatements on takeover bids. Table 3,
Column (2) shows that the coefficient on RESTATE remains significantly negative (0.79, p ,
0.01). The coefficient on both WEAKIC and its interaction with RESTATE are positive, but
insignificant. We leave it to future research for a comprehensive analysis on the effects of internal
control weaknesses on acquisitions.
CEO Turnover
The prior literature shows that there is a higher likelihood of top management turnover
following financial restatements (Srinivasan 2005; Desai et al. 2006b). If restating firms choose to
12
13
14
According to Palmrose and Scholz (2004), it is significantly less likely that shareholder lawsuits are filed against
restating firms more than one year after the restatement announcement. This is consistent with the statute of
limitations in securities law under Section 1658(b) related to the filing of lawsuits claiming violation of Section 10(b),
which limits the right to litigate to two years from the discovery of a misstatement (which usually occurs before the
restatement announcement). We also include a one-year window prior to the restatements because a number of firms
in our sample have other restatements earlier in the year.
We are grateful to Mary Billings for providing the litigation data from Billings (2010).
In untabulated robustness analyses, instead of using actual litigation filed, we estimate an ex ante measure of litigation
probability based on Palmrose and Scholz (2004). We identify restating firms within the top quintile of the litigation
probability as having high litigation risk (HIGHLITI) and the rest as having low litigation risk (LOWLITI). We use
HIGHLITI and LOWLITI to replace RESTATE in Model (1). Both LOWLITI and HIGHLITI have significantly
negative coefficients (0.70 and 0.91, respectively) that are insignificantly different from each other.

January 2015

January 2015
2.14
1.69
2.46
7.29***
8.96***
0.10
0.65
0.09
14.95***
4.87**
51.37***
0.09
0.05
0.09
0.73
0.59
0.15
0.34
0.11
0.50
0.84
3.23
Yes
3,926
1.85%
4.15**
11.12***
0.58
0.60
0.14
0.19
0.12
0.01
0.00
0.75
0.42
0.76
0.00
0.03
0.00
0.04
0.00
p-value
Yes
2,884
1.95%
0.01
0.04
0.07
0.96
0.58
0.31
0.07
0.82
0.30
0.61
3.96
0.79
0.43
0.23
Coefficient
0.01
0.17
0.63
9.93***
5.61**
0.31
0.02
3.00*
3.70**
3.60*
60.39***
9.64***
1.85
0.25
v2
0.91
0.68
0.43
0.00
0.02
0.58
0.90
0.08
0.05
0.06
0.00
0.00
0.17
0.62
p-value
1.33
0.00
6.93***
0.74
0.18
0.56
0.02
0.47
1.76
0.60
1.48
3.08*
190.46***
0.58
0.04
0.31
0.07
0.06
0.41
0.08
0.65
0.73
1.36
0.33
0.98
13.91
Yes
1,346
3.65%
3.34*
v2
0.71
Coefficient
(3)
CEO Turnover
0.25
0.95
0.01
0.39
0.67
0.45
0.88
0.49
0.19
0.44
0.22
0.08
0.00
0.07
p-value
This table reports logistic regression results for the propensity score matched sample of restatements on the dependent variable TAKEOVER. Column (1) examines restatements
with and without litigation in one year separately around the restatements. Column (2) examines the implications of internal control weaknesses based on data in Audit Analytics.
Column (3) examines the implication of CEO turnover based on data in ExecuComp. All regressions control for year fixed effects. All variables are measured at the end of the year
of the restatement filing. All continuous variables are winsorized at 1 percent and 99 percent. Standard errors are clustered at the industry level.
All variables are defined in Appendix A
Year dummies
Obs.
R2
LITI
NOLITI
RESTATE
WEAKIC
RESTATE WEAKIC
TURNOVER
RESTATE TURNOVER
SIZE
BM
EP
LEVERAGE
SGROW
LIQUIDITY
TANG
ROA
GRDUMMY
INST
Intercept
v2
(2)
Internal Control
Takeover Likelihood: Additional Analysis
Coefficient
(1)
Litigation
TABLE 3
15
16
proactively address governance problems by replacing incumbent management, then this can
mitigate the incentives for external acquirers to intervene, which provides an alternative explanation
to our main results in Table 2. We, therefore, investigate whether CEO turnover affects the relation
between financial restatements and the takeover likelihood.
Our data source of CEO turnover is ExecuComp. In order to increase our sample size and,
hence, the power of our tests, we regenerate our propensity score matched pairs based on all firms
that are covered by ExecuComp with all other procedures exactly the same as described in Section
III. We obtain 673 pairs of restating and non-restating firms with all required data available. A total
of 114 (17 percent) of restating firms and 68 (10 percent) of non-restating firms experience CEO
turnover in the event year. The difference in turnover frequency between the two groups of firms is
statistically significant (p , 0.01), consistent with prior research that restating firms are more likely
to replace CEOs.
We add an indicator variable, TURNOVER, and its interaction with RESTATE to our regression
Model (1). Table 3, Column (3) reveals that the coefficient on RESTATE remains significantly
negative at 0.71 (p 0.07), suggesting that the negative effects of financial restatements on the
takeover likelihood is robust to controls for the effects of CEO turnover. The coefficients on
TURNOVER and its interaction with RESTATE are both insignificant.
Overall, this section provides robust evidence that the filing of financial restatements is
negatively associated with the likelihood of receiving a takeover bid. This effect is both statistically
and economically significant. Further analyses show that our results are robust to controlling for
additional factors, including litigation risk, internal control effectiveness, and CEO turnover,
suggesting that information risk is most likely the driving factor in potential acquirers hesitation to
make takeover offers to restating firms.
V. FINANCIAL RESTATEMENTS AND LIKELIHOOD OF TAKEOVER WITHDRAWAL
This section examines our second research question, how a previous financial restatement
affects the likelihood of withdrawal of a takeover bid, by applying the following model for our
empirical tests:

X
X
bi CONTROLi
yi YEARi e :
ProbWITHDRAW 1 f b0 b1 RESTATE
2
The dependent variable is WITHDRAW, which takes a value of 1 if the deal status was coded as
withdrawal in SDC, and 0 otherwise. The variable of interest is RESTATE, which takes a value of 1
if the target firm filed any restatements in the 12 months prior to the takeover announcement, and 0
otherwise. Following Skaife and Wangerin (2013), we control for both deal characteristics and
target characteristics measured as of the fiscal year-end prior to the takeover announcement. In
general, the prior literature suggests that most of the same target characteristics that make firms
attractive takeover targets, such as SIZE, BM, and INST, are associated with takeover completion
likelihood, as well (Ambrose and Megginson 1992; Schwert 2000; Dong et al. 2006; Cremers et al.
2009; Gorton et al. 2009). Therefore, we include all control variables from Model (1). In addition,
we control for insider holdings (INSIDER) following Moeller (2005), where insider holdings
proxies for entrenched and more powerful boards that are better able to oppose takeover bids.
Prior evidence also suggests a strong association between deal characteristics and takeover
completion rates. Following this literature (Betton, Eckbo, and Thorburn 2008; Schwert 2000;
Bates and Lemmon 2003; Moeller, Schlingemann, and Stulz 2004; Skaife and Wangerin 2013), we
January 2015
17
FIGURE 3
The Time-Series of Takeover Activities
This figure is based on 2,271 takeover bids during 20022009. The figure shows the time trend of the number of takeover
bids and percentage of takeover target firms that restate financial statements in the previous year.
include the following deal characteristics: diversifying takeovers (DIV), multiple bidders (MBID),
hostile bids (HOST), tender offers (TENDER), the percentage of stock used as payment
(PCTSTOCK), and existence of termination fee clauses for bidder and target (ATERM and TTERM).
We obtain 2,271 deals with data available for all control variables during 20022009. Figure 3
plots the frequency of takeover bids and the percentage of restating firms over time for this sample.
Largely consistent with economic cycles, we observe the highest number of takeover bids in 2006
2007 and the lowest number during the financial crisis of 20082009. The percentage of restating
targets generally follows the pattern in Figure 2, with a higher frequency of restating targets in
20052006 and a lower frequency in 2002 and 2009.
Table 4 reports descriptive statistics of all variables used in Model (2) separately for the
takeover deals with restating targets (RESTATE 1) in Panel A, and for all other takeover deals in
the sample (RESTATE 0) in Panel B. On average, the 161 restating targets have significantly
lower sales growth (4 percent versus 15 percent) and significantly lower liquidity (38 percent versus
43 percent) than the 2,110 non-restating targets, but significantly higher leverage (19 percent versus
16 percent) and significantly higher insider holdings (5 percent versus 3 percent). Differences in
medians are generally much smaller in magnitude and/or insignificant. All other target
characteristics are not statistically different between the two groups.
Table 4 also reports that restating targets are more likely to be diversifying (56 percent versus
49 percent) and less likely to receive tender offers (6 percent versus 13 percent) than non-restating
targets. All other deal characteristics are not significantly different. On average, 11 percent (9
percent) of restating (non-restating) targets receive multiple bids, 6 percent (6 percent) receive
hostile offers, 20 percent (16 percent) have acquirer termination fee clauses, and 61 percent (59
January 2015
18
TABLE 4
Descriptive Statistics of the Takeover Sample
Panel A: Restating Firms (RESTATE 1)
Variable
SIZE
BM
EP
LEVERAGE
SGROW
LIQUIDITY
TANG
ROA
GRDUMMY
INST
INSIDER
MBID
HOST
DIV
TENDER
PCTSTOCK
ATERM
TTERM
Mean
Median
P25
P75
Std. Dev.
161
161
161
161
161
161
161
161
161
161
161
161
161
161
161
161
161
161
5.14
1.37
1.01
0.19*
0.04***
0.38***
0.22
0.03
0.39
0.41
0.05**
0.11
0.06
0.56*
0.06***
16.71
0.20
0.61
5.18
0.51
0.01
0.13
0.05*
0.33***
0.12
0.08
0.00
0.37
0.00*
0.00
0.00
1.00*
0.00***
0.00
0.00
1.00
3.93
0.31
0.10
0.00
0.06
0.16
0.04
0.01
0.00
0.06
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
6.68
0.78
0.06
0.30
0.15
0.57
0.37
0.12
1.00
0.73
0.03
0.00
0.00
1.00
0.00
0.00
0.00
1.00
1.98
11.88
6.42
0.23
0.23
0.24
0.24
0.21
0.49
0.34
0.11
0.31
0.23
0.50
0.23
34.87
0.40
0.49
Panel B: Non-Restating Firms (RESTATE 0)

Variable
SIZE
BM
EP
LEVERAGE
SGROW
LIQUIDITY
TANG
ROA
GRDUMMY
INST
INSIDER
MBID
HOST
DIV
TENDER
PCTSTOCK
ATERM
TTERM
Mean
Median
P25
P75
Std. Dev.
2,110
2,110
2,110
2,110
2,110
2,110
2,110
2,110
2,110
2,110
2,110
2,110
2,110
2,110
2,110
2,110
2,110
2,110
4.99
1.87
2.25
0.16
0.15
0.43
0.21
0.02
0.35
0.42
0.03
0.09
0.06
0.49
0.13
18.16
0.16
0.59
4.96
0.52
0.03
0.08
0.06
0.40
0.11
0.07
0.00
0.38
0.00
0.00
0.00
0.00
0.00
0.00
0.00
1.00
3.54
0.29
0.13
0.00
0.04
0.20
0.03
0.01
0.00
0.09
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
6.55
0.86
0.06
0.25
0.20
0.66
0.30
0.13
1.00
0.71
0.02
0.00
0.00
1.00
0.00
0.00
0.00
1.00
2.19
31.14
23.77
0.21
0.75
0.26
0.23
0.25
0.48
0.33
0.07
0.28
0.23
0.50
0.33
34.85
0.36
0.49
*, **, *** Indicate two-sided significance levels of 10 percent, 5 percent, and 1 percent, respectively, for the difference
between the restating targets and the non-restating targets, based on t-tests for means and Wilcoxon tests for medians.
This table is based on 2,271 takeover bids during 20022009. RESTATE equals 1 if the target firm filed financial
restatements in the year prior to the bid announcement, and 0 otherwise. Panel A shows descriptive statistics for
RESTATE 1 and Panel B shows descriptive statistics for RESTATE 0. All variables are measured at the end of the
fiscal year prior to the takeover announcements. All continuous variables are winsorized at 1 percent and 99 percent.

January 2015
19
percent) have target termination fee clauses. The percentage of stock used in the acquisition of these
targets is, on average, 16.7 percent for restating versus 18.2 percent for non-restating firms.
Empirical Results
Table 5, Panel A reports the contingency table between RESTATE and WITHDRAW for the
sample of 2,271 deals of Model (2). Among the 161 deals with restating targets, 33 (20.5 percent)
were eventually withdrawn compared to 273 (12.9 percent) among the 2,110 deals with nonrestating targets. This difference in frequencies is statistically significant at 0.01 (Chi-square
7.33).
Column (1) of Table 5, Panel B provides logistics estimates of Model (2) that includes target
and deal characteristics as control variables. Column (2) additionally includes variables from the
Dechow et al. (2011) model we use in our matching procedure in the previous section (coefficients
suppressed in the table). In both columns, the coefficient on RESTATE is positive and statistically
significant (0.71 and 0.59, p 0.01 and p 0.05, respectively). In Column (1), restating targets
have a 15.4 percent likelihood of withdrawal compared to 8.2 percent for non-restating targets,
setting all other variables at their corresponding sample means. Thus, previous financial
restatements increase the likelihood of takeover bids being withdrawn by almost 88 percent
relative to takeover bids to non-restating targets.
Columns (1) and (2) further show that the likelihood that takeover bids will be withdrawn is
negatively correlated with firm size, tender offers, and the existence of target termination fee
clauses, and positively associated with institutional ownership, insider holdings, the presence of
multiple bidders, hostile bids, and diversifying mergers. There is also a higher likelihood of
withdrawal with increasing percentage of stock used in the acquisition. The signs of the coefficients
on the control variables and the explanatory power of the model (R2 around 20 percent) are
generally consistent with prior evidence (Golubov, Petmezas, and Travlos 2012; Skaife and
Wangerin 2013).
Additional Tests
Financial restatements may not only increase the likelihood of bid withdrawal, but also lead to
a lengthier transaction process. Once the takeover bid is initiated and the acquisition agreement
signed, the bidder begins the due diligence process to verify the targets financial information and to
gain more current information to value the targets assets and liabilities. If the information risk is
higher in takeover attempts of target firms that have previously filed financial restatements, then we
expect the acquirer to exert more effort during the due diligence. Following the prior literature, we
count the number of days between the acquisition announcement and the day of completion as a
proxy for the effort in the due diligence (Wangerin 2012; Marquardt and Zur 2013). We use the
decile ranks of this time lag as our dependent variable TIME.
Table 6 presents the OLS regression results for time to completion. We use the same control
variables as before (except for the indicator variables for termination fee clauses), following the
prior literature (Golubov et al. 2012; Wangerin 2012; Marquardt and Zur 2013). Specifically,
Column (1) includes target and deal characteristics as control variables, and Column (2)
additionally includes the misstatement determinant variables from Dechow et al. (2011). The
coefficients on RESTATE are positive and statistically significant in both specifications (0.56 and
0.73, both p 0.04), suggesting that transactions involving restating targets take significantly
longer to complete. We interpret this as evidence that bidders exert more effort and care in the due
diligence for acquisitions of targets with higher information risk. Wangerin (2012) provides
corroborating evidence using other target characteristics as proxies for information risk, and
Marquardt and Zur (2013) similarly find a negative relation between accounting quality and time to
January 2015
20
TABLE 5
Likelihood to Withdraw
WITHDRAW
RESTATE
0
1
Total
0
1,837
[87.1%]
128
[79.5%]
1,965
[86.5%]
v2
p-value
1
273
[12.9%]
33
[20.5%]
306
[13.5%]
Total
2,110
[92.9%]
161
[7.1%]
2,271
7.33***
0.00
Panel B: Logistic Regression Results

(1)
RESTATE
SIZE
BM
EP
LEVERAGE
SGROW
LIQUIDITY
TANG
ROA
GRDUMMY
INST
INSIDER
MBID
HOST
DIV
TENDER
PCTSTOCK
ATERM
TTERM
Intercept
Further controls
Year dummies
Obs.
R2
(2)
Coefficient
v2
p-value
Coefficient
v2
p-value
0.71
0.15
0.01
0.02
0.16
0.05
0.19
0.57
0.20
0.22
0.71
1.77
2.27
2.89
0.55
0.74
0.01
0.33
0.81
2.52
7.45***
10.01***
1.21
1.29
0.22
0.92
0.15
1.30
0.26
2.41
5.46**
3.96**
143.04***
76.82***
15.95***
8.69***
20.95***
2.12
14.68***
30.52***
0.01
0.00
0.27
0.26
0.64
0.34
0.70
0.25
0.61
0.12
0.02
0.05
0.00
0.00
0.00
0.00
0.00
0.15
0.00
0.00
0.59
0.14
0.02
0.03
0.12
0.04
1.15
2.16
0.09
0.19
0.69
0.95
2.24
2.77
0.66
0.76
0.01
0.29
0.94
4.39
3.96**
7.17***
2.49
2.62
0.11
0.25
1.37
4.56**
0.06
1.20
3.21*
1.10
77.82***
55.62***
21.44***
7.32***
13.97***
2.53
12.80***
18.22***
0.05
0.01
0.11
0.11
0.75
0.62
0.24
0.03
0.81
0.27
0.07
0.29
0.00
0.00
0.00
0.01
0.00
0.11
0.00
0.00
No
Yes
2,271
20.01%
Yes
Yes
1,654
22.01%
This table is based on 2,271 takeover bids during 20022009. Panel A reports the v2 test for the contingent distribution
between WITHDRAW and RESTATE. RESTATE equals 1 if the target firm filed restatements in the year prior to the bid
announcement, and 0 otherwise. WITHDRAW equals 1 if the bid is coded as withdrawal by SDC, and 0 otherwise. Panel
B reports logistic regression results on the dependent variable WITHDRAW. Column (2) includes determinant variables
for financial restatements from Dechow et al. (2011) as controls (coefficient estimates not tabulated), in addition to

January 2015
21
TABLE 5 (continued)
variables included in Column (1). All regressions control for year fixed effects. All variables are measured at the end of
the fiscal year prior to the takeover announcements. All continuous variables are winsorized at 1 percent and 99 percent.
Standard errors are clustered at the industry level.
completion. Consistent with the prior literature, bids involving larger targets, targets with higher
leverage, higher profitability, higher percentage of stock used as payment, as well as hostile bids,
take longer to complete. On the other hand, targets with higher sales growth, higher insider
holdings, and higher institutional ownership are associated with a shorter time to completion.
To summarize, the results in this section suggest that acquirers are not only less likely to make
takeover bids to restating firms, but if they make bids to such firms, then the bids are also more
TABLE 6
Time to Deal Completion
(1)
RESTATE
SIZE
BM
EP
LEVERAGE
SGROW
LIQUIDITY
TANG
ROA
GRDUMMY
INST
INSIDER
MBID
HOST
DIV
TENDER
PCTSTOCK
Intercept
Further controls
Year dummies
Obs.
R2
(2)
Coefficient
t-stat
p-value
Coefficient
t-stat
p-value
0.56
0.36
0.00
0.00
0.78
0.17
0.33
0.28
1.15
0.28
1.55
2.21
0.56
3.82
0.16
2.78
0.02
4.37
2.13**
6.72***
1.43
1.46
1.91*
2.30**
0.49
0.45
3.06***
2.13**
3.37***
2.57***
1.27
6.02***
0.74
9.00***
6.06***
9.79***
0.04
0.00
0.16
0.15
0.06
0.02
0.62
0.65
0.00
0.04
0.00
0.01
0.21
0.00
0.46
0.00
0.00
0.00
0.73
0.39
0.00
0.00
0.73
0.18
0.88
0.72
0.47
0.13
0.44
0.15
0.99
3.38
0.09
2.33
0.02
4.23
2.12**
6.37***
0.70
0.34
1.77*
1.86*
1.06
0.75
1.12
0.72
1.39
0.18
2.61***
4.45***
0.60
10.30***
6.10***
3.76***
0.04
0.00
0.48
0.73
0.08
0.07
0.30
0.46
0.27
0.47
0.17
0.86
0.01
0.00
0.55
0.00
0.00
0.00
No
Yes
1,595
29.62%
Yes
Yes
1,122
30.47%
This table reports results of OLS regressions on the dependent variable TIME, which is the decile rank of the number of
days from announcement to completion of the takeover. RESTATE equals 1 if the target firm filed restatements in the
year prior to the bid announcement, and 0 otherwise. The sample period is 20022009. Column (2) includes determinant
variables for financial restatements from Dechow et al. (2011) as controls (coefficient estimates not tabulated), in addition
to variables included in Column (1). All regressions control for year fixed effects. All continuous variables are
winsorized at 1 percent and 99 percent. All variables are measured at the end of the fiscal year prior to the takeover
announcements. Standard errors are clustered at the industry level.

January 2015
22
likely to be withdrawn. Furthermore, we find evidence that takeover offers for restating targets
require more effort from the bidder during the due diligence and take longer to complete. These
results provide further support to the conjecture that financial restatements and the resulting high
information risk introduce frictions to the market for corporate control, impeding the efficient
allocation of economic resources.
VI. FINANCIAL RESTATEMENTS AND TAKEOVER DEAL VALUATIONS
We examine whether takeover bids for restating targets are associated with lower takeover deal
valuation. Following Officer (2007), we examine valuation ratios provided by the SDC database:
deal value excluding assumed liabilities to EBITDA, deal value excluding assumed liabilities to
sales, and offer price to book value per share. As explained in more detail in Section II, we focus on
valuation multiples instead of market-based measures to understand how financial restatements
affect the decision making by acquiring firms. Our control variables follow the prior literature and
include both target and deal characteristics (Moeller et al. 2004; Officer 2007; Betton et al. 2008).
Descriptive statistics and univariate tests for the three ratios are provided in Table 7, Panel A.
For the ratio of deal value to EBITDA,15 the mean and the median of the 105 deals involving
restating targets are 14.41 and 9.83, respectively, versus a mean of 19.70 and median of 11.06 for
the 1,343 deals involving non-restating targets, where only the difference in means is statistically
significant (at the 0.01 level). For the second ratio, deal value to sales, the mean (median) for the
141 deals involving restating targets is 1.77 (1.31) versus a mean (median) of 3.01 (1.67) for the
1,852 deals involving non-restating targets. The differences in means and medians are both
statistically significant at the 0.01 and 0.05 levels, respectively. For offer price to book value per
share, the means and medians are lower for the 127 acquisitions of restating targets (2.96 and 2.28,
respectively) than for the 1,689 acquisitions of non-restating targets (3.39 and 2.34, respectively),
but the differences are not statistically significant.
Empirical Results
Table 7, Panels B, C, and D report OLS regression estimates on the deal valuation ratios.
Column (1) includes target and deal characteristics as controls, and Column (2) additionally
includes restatement determinants from Dechow et al. (2011) (coefficients suppressed in the table).
In Panel B, the dependent variable is the ratio of deal value to EBITDA. The results are based on a
sample of 1,448 and 1,056 takeovers with non-missing data, respectively. The coefficients on
RESTATE are 3.40 (p 0.03) and 6.57 (p , 0.01), respectively, suggesting that, ceteris paribus,
takeover bids for restating targets have, on average, lower deal values by about five times of
EBITDA (the average of 3.40 and 6.57). Considering that the average ratio of deal value to
EBITDA for acquisitions of non-restating targets (reported in Table 7, Panel A) is 19.70, this
represents a discount of about 25 percent.
15
This earnings-based multiple should be interpreted with caution because it is truncated and only meaningful and
reported by SDC when EBITDA is positive, which is why we also examine non-earnings-based multiples. One
possible way to address this issue is to use the inverted ratio by dividing EBITDA with deal value excluding assumed
liabilities, each reported by SDC individually. However, the inverted ratios are not a linear transformation of the
original valuation ratios, which can change the relation between these deal multiples and our independent variables,
especially considering that we estimate a linear regression. Moreover, the inverted ratios are not what investors use for
valuation and, thus, may not be helpful in understanding acquirers valuation of the target. In untabulated analyses, we
use the inverted ratio EBITDA to deal value as our dependent variable. RESTATE is insignificant in this specification.

January 2015
23
TABLE 7
Ratios of Takeover Offer Prices to Fundamentals
Variable
RESTATE 1
Deal Value/EBITDA
Deal Value/Sales
Offer Price/Book Value
RESTATE 0
Deal Value/EBITDA
Deal Value/Sales
Offer Price/Book Value
105
141
127
1,343
1,852
1,689
Mean
Median
P25
P75
Std. Dev.
14.41***
1.77***
2.96
9.83
1.31**
2.28
6.72
0.59
1.56
16.20
2.49
3.28
17.33
1.65
2.87
6.70
0.68
1.48
18.04
3.26
3.59
35.73
5.76
5.45
19.70
3.01
3.39
11.06
1.67
2.34
Panel B: Regression Results (Dependent Variable: Deal Value/EBITDA)

(1)
RESTATE
SIZE
BM
EP
LEVERAGE
SGROW
LIQUIDITY
TANG
ROA
GRDUMMY
INST
INSIDER
MBID
HOST
DIV
TENDER
PCTSTOCK
Intercept
Further controls
Year dummies
Obs.
R2
(2)
Coefficient
t-stat
p-value
Coefficient
t-stat
p-value
3.40
0.15
0.03
0.07
12.86
6.60
20.18
1.65
75.06
2.15
10.42
5.41
0.27
3.33
2.28
7.49
0.07
13.54
2.25**
0.18
0.58
1.30
1.83*
1.37
1.88*
0.37
4.42***
1.08
2.35**
0.63
0.08
1.38
1.09
2.00**
3.29***
2.02**
0.03
0.86
0.56
0.20
0.07
0.18
0.06
0.71
0.00
0.28
0.02
0.53
0.94
0.17
0.28
0.05
0.00
0.05
6.57
0.07
0.03
0.08
7.31
7.10
3.33
48.59
97.01
1.26
1.56
8.86
2.58
3.47
4.72
2.30
0.01
64.09
3.51***
0.10
0.61
1.33
1.36
1.81*
0.49
4.23***
5.20***
0.66
0.42
0.89
0.96
1.51
3.16***
1.34
0.53
6.99***
0.00
0.92
0.54
0.19
0.18
0.07
0.62
0.00
0.00
0.51
0.68
0.38
0.34
0.14
0.00
0.19
0.60
0.00
No
Yes
1,448
13.03%
Yes
Yes
1,056
30.32%
Panel C: Regression Results (Dependent Variable: Deal Value/Sales)

(1)
RESTATE
SIZE
BM
(2)
Coefficient
t-stat
p-value
Coefficient
t-stat
p-value
0.80
0.50
0.00
2.51***
5.58***
0.72
0.01
0.00
0.48
0.87
0.50
0.01
2.24**
3.62***
1.22
0.03
0.00
0.23

January 2015
24
TABLE 7 (continued)
(1)
EP
LEVERAGE
SGROW
LIQUIDITY
TANG
ROA
GRDUMMY
INST
INSIDER
MBID
HOST
DIV
TENDER
PCTSTOCK
Intercept
Further controls
Year dummies
Obs.
R2
(2)
Coefficient
t-stat
p-value
Coefficient
t-stat
p-value
0.00
0.49
1.36
3.08
0.87
5.21
0.35
0.03
1.45
0.26
0.28
0.15
0.89
0.01
1.11
0.67
0.45
1.58
1.90*
1.51
2.08**
1.02
0.04
1.96**
0.72
0.39
0.50
2.68***
1.45
0.88
0.51
0.65
0.12
0.06
0.14
0.04
0.31
0.97
0.05
0.48
0.70
0.62
0.01
0.15
0.38
0.00
0.01
1.53
6.60
12.18
4.97
0.24
0.43
1.17
0.70
0.62
0.19
0.83
0.01
14.58
0.49
0.01
1.12
3.15***
3.01***
2.58***
1.01
1.09
1.21
1.50
0.66
0.50
2.64***
1.26
3.47***
0.63
0.99
0.27
0.00
0.00
0.01
0.32
0.28
0.23
0.14
0.51
0.62
0.01
0.21
0.00
No
Yes
1,993
13.25%
Yes
Yes
1,451
23.10%
Panel D: Regression Results (Dependent Variable: Offer Price/Book Value)

(1)
RESTATE
SIZE
BM
EP
LEVERAGE
SGROW
LIQUIDITY
TANG
ROA
GRDUMMY
INST
INSIDER
MBID
HOST
DIV
TENDER
PCTSTOCK
Intercept
Further controls
Year dummies
Obs.
R2
(2)
Coefficient
t-stat
p-value
Coefficient
t-stat
p-value
0.51
0.29
0.08
0.06
5.78
0.44
2.47
0.21
1.75
0.18
0.49
0.45
0.12
0.64
0.07
0.75
0.00
0.52
1.45
1.64
2.24**
1.02
1.87*
1.93*
2.21**
0.19
1.22
0.54
0.72
0.52
0.28
2.54***
0.28
2.16**
0.43
0.46
0.15
0.11
0.03
0.31
0.07
0.06
0.03
0.85
0.23
0.59
0.47
0.60
0.78
0.01
0.78
0.04
0.67
0.64
0.33
0.51
0.13
0.04
8.21
0.30
5.23
0.34
2.01
0.38
0.98
0.10
0.31
0.72
0.33
0.20
0.00
3.00
0.94
1.99**
1.45
0.82
2.52***
0.91
3.06***
0.19
1.40
1.05
1.38
0.10
0.71
2.66***
1.65*
0.62
0.02
1.22
0.35
0.05
0.15
0.41
0.01
0.36
0.00
0.85
0.17
0.30
0.17
0.92
0.48
0.01
0.10
0.54
0.98
0.23
No
Yes
1,815
6.13%
Yes
Yes
1,292
10.58%

January 2015
25
TABLE 7 (continued)
This table is based on takeover bids during 20022009. RESTATE equals 1 if the target firm filed financial restatements
in the year prior to the bid announcement, and 0 otherwise. Panel A shows descriptive statistics and univariate tests for
restating and non-restating firms. Tests of differences are based on t-tests for means and Wilcoxon tests for medians.
Panels BD report OLS regressions on three different transaction valuation multiples of the target firm. Deal values
exclude assumed liabilities. Column (2) includes determinant variables for financial restatements from Dechow et al.
(2011) as controls (coefficient estimates not tabulated), in addition to variables included in Column (1). All regressions
control for year fixed effects. All variables are measured at the end of the fiscal year prior to the takeover announcements.
All continuous variables are winsorized at 1 percent and 99 percent. Standard errors are clustered at the industry level.
In Table 7, Panel C, the dependent variable is the ratio of deal value to sales, and the sample
size is 1,993 for Column (1) and 1,451 for Column (2). In both columns, the coefficient on
RESTATE is significantly negative (0.80 and 0.87, p 0.01 and p 0.03, respectively).
Compared to the mean deal value to sales ratio of 3.01 for non-restating targets, on average,
restating targets are offered an approximately 28 percent discount. In Panel D, the dependent
variable is the ratio of offer price to book value per share. The coefficients on RESTATE are
negative, albeit insignificantly so (0.51 and 0.33, p 0.15 and p 0.35, respectively). Table 7,
Panels B, C, and D also provide some evidence (although not in all specifications) that takeover
deal valuations are increasing in target firms size, leverage, sales growth, liquidity, and for tender
offers, but decreasing in the target firms tangibility, ROA, insider holdings, for hostile bids, and
diversifying deals, which is broadly consistent with the prior literature (Moeller et al. 2004; Officer
2007; Betton et al. 2008).
Overall, we find some evidence, albeit not consistently strong across different measures, that
targets that have previously restated their financial statements are valued at lower deal multiples by
acquirers than similar non-restating targets. Although one has to exercise caution in interpreting these
deal multiples, these results complement our earlier analyses by showing that financial restatements
not only affect the likelihood of takeover, but also the valuation of restating firms, consistent with the
notion that the higher information risk of restating targets increases their cost of capital.
VII. CONCLUDING REMARKS
In this study, we examine the consequences of financial restatements for the market for
corporate control. We find that firms that recently filed financial restatements are significantly less
likely to become takeover targets than a sample of matched non-restating firms. Our results further
show that takeover bids made to restating firms are also more likely to be withdrawn, and take
longer to complete, than takeover bids to non-restating firms. Finally, there is some evidence that
deal value multiples of completed acquisitions are significantly lower for restating targets than for
target firms that did not previously restate their earnings.
Our results complement prior research on the economic consequences of financial restatements
by showing that financial restatements affect takeover decisions and valuations in the market for
corporate control. We show that higher information risk after restatement filings deters potential
bidding firms from correcting inefficiencies within restating firms via the forces of the disciplinary
takeover.
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APPENDIX A
Variable Definitions
Variable
ATERM
LEASE/BACKDATING
BM
DIV
EP
ERROR
FRAUD
GRDUMMY
HOST
Definition
Indicator variable equal to 1 if there is a termination fee clause for the acquirer
in place, and 0 otherwise (data from SDC).
Indicator variable equal to 1 if the restatement is related to stock options
backdating or lease accounting, and 0 otherwise (data from Audit Analytics).
Book-to-market ratio [CEQT/(PRCC CSHO)].
Indicator variable equal to 1 if takeover is diversifying, and 0 otherwise, where
diversification is based on two-digit SIC codes.
Earnings-to-price ratio [EPSPX/PRCC].
Indicator variable equal to 1 if the restatement is due to error based on GAO
restatements provided by Hennes et al. (2008), and 0 otherwise.
Indicator variable equal to 1 if the restatement is due to fraud as identified by
Audit Analytics, and 0 otherwise.
Growth-resource mismatch dummy following Palepu (1986). Equal to 1 for
firms with low growth (SGROW), high liquidity (LIQUIDITY), and low
leverage (LEVERAGE) or for firms with high growth, low liquidity, high
leverage, and 0 otherwise, where low and high for each variable is defined
relative to Compustat median in the year.
Indicator variable equal to 1 if takeover bid is classified as hostile, and 0
otherwise (data from SDC).

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29
APPENDIX A (continued)
Variable
INSIDER
INST
IRREGULARITY
LEVERAGE
LIQUIDITY
LITI
MBID
NOLITI
OTHER
PCTSTOCK
RESTATE
ROA
SGROW
SIZE
TAKEOVER
TANG
TENDER
TIME
TTERM
TURNOVER
WEAKIC
WITHDRAW

January 2015
Definition
Percentage of insider holdings (data from Thomson Reuters).
Percentage of institutional ownership (data from Thomson Reuters).
Indicator variable equal to 1 if the restatement is due to irregularity based on
GAO restatements provided by Hennes et al. (2008), and 0 otherwise.
Financial leverage [(DLTT DLC)/AT].
Liquidity [(CHE RECT)/AT].
Indicator variable equal to 1 if restating firm has been subject to shareholder
litigation in the year around the restatement filing, and 0 otherwise (data from
Billings [2010]).
Indicator variable equal to 1 if multiple bidders are involved in the takeover
process, and 0 if only one bidder is involved (data from SDC).
Indicator variable equal to 1 if restating firm has not been subject to shareholder
litigation in the year around the restatement filing, and 0 otherwise (data from
Billings [2010]).
Indicator variable equal to 1 if the restatement is not related to either stock
options backdating or lease accounting, and 0 otherwise (data from Audit
Analytics).
Percentage of stock offered as payment in the acquisition by the bidding firm
(data from SDC).
Indicator variable equal to 1 if firm has restated earnings, and 0 otherwise (data
from Audit Analytics).
Return on assets [INCOME/AT].
Sales growth rate [SALEt/SALEt1 1].
Natural logarithm of market value of equity [PRCC CSHO].
Indicator variable equal to 1 if firm has received a takeover offer, and 0
Tangibility [PPENT/AT].
Indicator variables equal to 1 if takeover classified as tender offer, and 0
Decile rank of the number of days from announcement of the takeover to
completion (data from SDC).
Indicator variable equal to 1 if there is a termination fee clause for the acquirer
in place, and 0 otherwise (data from SDC).
Indicator variable equal to 1 if the firm experiences a change in CEO in the
event year, and 0 otherwise (data from ExecuComp).
Indicator variable equal to 1 if the firm reports ineffective internal control based
on Section 302 or 404 disclosures required by the Sarbanes-Oxley Act, and 0
otherwise (data from Audit Analytics).
Indicator variable equal to 1 if takeover offer has been withdrawn, and 0
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THE ACCOUNTING REVIEW

Vol. 90, No. 1

American Accounting Association

The Economic Consequences of Financial

Submitted: June 2012

Amel-Zadeh and Zhang

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IV. FINANCIAL RESTATEMENTS AND TAKEOVER LIKELIHOOD

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Panel B: Logistic Regression Results

Panel A: Univariate Test Results

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Takeover Likelihood: Additional Analysis

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Panel B: Non-Restating Firms (RESTATE 0)

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Panel B: Logistic Regression Results

(continued on next page)

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Panel B: Regression Results (Dependent Variable: Deal Value/EBITDA)

Panel C: Regression Results (Dependent Variable: Deal Value/Sales)

(continued on next page)

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Panel D: Regression Results (Dependent Variable: Offer Price/Book Value)

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