Does the readability of target firms' annual reports matter to bidders?

This study investigates the impact of target firms' annual report readability on acquirers' negotiation strategies and stock market reactions to mergers and acquisitions (M&A). Higher readability is positively associated with bidders' market reactions and bid premiums and negatively related to the time needed to complete the deal. However, while readability improves market reactions, higher bid premiums reduce these gains. The results are robust, accounting for endogeneity using instrumental variable analysis and sample selection bias through propensity score matching and entropy balancing. The effects of readability on market reactions and bid premiums are more pronounced in non-tender offers, deals involving bidders without top legal teams, and target firms with higher information asymmetry (lower analyst following) and uncertainty (higher R&D intensity). Overall, this study highlights that the readability of target firms' financial reports enhances transparency and signals firm quality, making it an important factor for acquirers in evaluating M&A opportunities.