Using a large sample of mergers and acquisitions from 27 countries over a 16-year period, I investigate how differences in tax and financial reporting policies affect the premium and structure of cross-border mergers and acquisitions. I find evidence that firms pay a premium to reduce the tax risk associated with strict transfer pricing rules. Further analysis segments acquisitions into those that are strictly financial versus those that are more strategic. Financial acquisitions are those where the acquirer is making the purchase for investment purposes rather than strategic reasons. These financial transactions generally lead to less integration between the two companies and therefore less inter-company transactions involving transfer pricing. Evidence based on this segmentation suggests that only differences in transfer pricing risk for non-financial acquisitions are priced. The results suggest that while on average non-financial acquirers will pay a higher premium to reduce transfer pricing risk regardless of industry, only those in highly scrutinized industries with high levels of intangibles, such as pharmaceuticals, will demand a discount for transactions which increase transfer pricing risk. In tests of acquisition structure, I find that shareholder-level capital gain taxes influence the structure of an acquisition. The influence of shareholder-level taxes is reduced by the presence of information asymmetry concerning the acquirer’s stock value. However, higher quality financial reporting reduces information asymmetry and improves the tax efficiency of acquisition structure providing tangible economic benefit to shareholders.

Using a large sample of mergers and acquisitions from 27 countries over a 16-year period, I investigate how differences in tax and financial reporting policies affect the premium and structure of cross-border mergers and acquisitions. I find evidence that firms pay a premium to reduce the tax risk associated with strict transfer pricing rules. Further analysis segments acquisitions into those that are strictly financial versus those that are more strategic. Financial acquisitions are those where the acquirer is making the purchase for investment purposes rather than strategic reasons. These financial transactions generally lead to less integration between the two companies and therefore less inter-company transactions involving transfer pricing. Evidence based on this segmentation suggests that only differences in transfer pricing risk for non-financial acquisitions are priced. The results suggest that while on average non-financial acquirers will pay a higher premium to reduce transfer pricing risk regardless of industry, only those in highly scrutinized industries with high levels of intangibles, such as pharmaceuticals, will demand a discount for transactions which increase transfer pricing risk. In tests of acquisition structure, I find that shareholder-level capital gain taxes influence the structure of an acquisition. The influence of shareholder-level taxes is reduced by the presence of information asymmetry concerning the acquirer’s stock value. However, higher quality financial reporting reduces information asymmetry and improves the tax efficiency of acquisition structure providing tangible economic benefit to shareholders.

Empirical evidence indicates that companies that reduce information asymmetry by increased voluntary disclosures achieve several benefits, such as lower cost of capital, improved pricing, and liquidity of their shares. Despite the possibility of such benefits, many studies report varying degrees of voluntary disclosure behaviour that is attributable to various factors. Recent studies indicate that investors’ investment horizon has a significant effect on actions taken by management. Companies with predominantly short-horizon investors spend less on research and development, invest in shorter-term projects that are less profitable than longer-term projects, and are more likely to manipulate earnings to meet short-term earnings expectations. This study investigates whether investors’ investment horizon has an effect on the quality of companies’ information environment. Long-horizon investors should be familiar with their investee company’s risks and rewards, using both their own internal information gathering processes and the cumulative information disclosed by management over time. Moreover, over the course of a long-term relationship, they can become familiar with management’s capability to deliver long-term sustainable returns. Long-horizon investors should therefore be less concerned with short-term fluctuations of earnings and management’s public explanations and disclosures thereof. I hypothesise that higher (lower) proportions of long-horizon investors are associated with lower (higher) quality voluntary disclosure. The shareholder familiarity hypothesis was tested in this study, using an ordinary least squares regression. Voluntary disclosures were observed via the channel of companies’ websites. A checklist was compiled of best practices for online investor relations, and content analyses were conducted on the websites of 205 companies listed on the Johannesburg Stock Exchange. Shareholder familiarity was proxied by shareholder stability, measured over nine years. The stability measure was lagged by one year to create a temporal difference between the shareholder profile and disclosure behaviour. I found that companies with a profile of unstable investors that are larger, younger, dual-listed and have a Big4 auditor have higher quality online investor relations practices. The hypothesis of a negative association between shareholder familiarity and voluntary disclosure quality is therefore accepted. This study extends the theory on information asymmetry and voluntary disclosure by providing evidence supporting the argument that investor horizon is a predictor of voluntary disclosure quality. The dictum of more is better does not hold in all scenarios. It is important for financial directors and investor relations officers to establish the investment horizon profile of their respective companies’ shareholders before they embark on extensive disclosure programmes. / Financial Intelligence