Effects of Business Combination on Accounting Information’s Value Relevance in the New Economy

• In Event: Financial Accounting and Reporting 9

Abstract

This paper studies the effects that business combinations have on accounting information’s value relevance under the new economy period. Value relevance is measured by the R2 from regressions of stock price on book values and earnings potential. Using SDC Mergers and Acquisition Database, this study identifies acquiring firm-years and non-acquiring firm-years and contrasts accounting information’s value relevance between the subsample groups. Book value equity is then decomposed into identifiable intangible assets, accounting goodwill and other book values for further analysis.
Empirical results show that acquiring firm-years have higher intangible assets and goodwill, and lower value relevance for book values. When decomposed into asset components, effects of accounting for business combinations also negatively affect those asset components’ explanatory power. It is interpreted that the market does not positively value the additional intangible assets capitalized upon business combinations.

Author

• Kang Cheng, Morgan State University