Reading Between the Balance Sheets: Earnings Quality as a Predictor of Deal Outcomes in Banking M&A

This thesis investigates whether the accounting quality of target banks is associated with the completion status of banking mergers and acquisitions (M&A). Drawing on the theory of information asymmetry (Akerlof, 1970) and its application to M&A settings (Officer, Poulsen, and Stegemoller, 2009), the central argument is that targets with weaker accounting quality, reflected in less conservative loan loss provisioning, higher non-performing loans, and weaker capitalization, increase valuation uncertainty for the acquirer, making deal completion less likely. Banks are a natural setting for this question. Unlike non-financial firms, their balance sheets contain accounting items, most notably loan loss provisions, over which managers exercise considerable discretion for income smoothing and signaling purposes (Kanagaretnam, Lobo, and Yang, 2004), making accounting quality both economically material and empirically tractable. The empirical analysis draws on a sample of 392 banking M&A deals with targets headquartered in the United States and Europe, collected from Bloomberg and spanning fiscal years 2016 to 2025. Target-level accounting variables, including size, leverage, asset quality, profitability, and capital adequacy, are measured for the fiscal year immediately preceding the announcement, consistent with the bank M&A literature (DeYoung, Evanoff, and Molyneux, 2009). Given the sample's numerical weight toward U.S. targets, the baseline model is re-estimated on the European sub-sample separately to assess whether results generalize across regulatory environments.