Market Responses to Private and Public Targets: The Role of Goodwill Valuation

• In Event: Financial I

Abstract

Mergers and acquisitions (M&As) are a big part of the corporate finance world. To gain useful insights on factors affecting market reactions to M&As, this study examines market responses to private and public M&As around their announcement and over the long run after their completion. Using a sample of over 1,500 M&A deals completed from 2002 to 2016 as sourced from the Securities Data Company, we performed regression analyses on certain variables examined in this study. Specifically, we find that investors tend to overprice the value of intangible assets acquired from private targets at the time of an M&A’s announcement, and the overpricing on goodwill gets corrected in the subsequent years after the M&A’s completion. In exploring the rationale behind this overpricing correction, our results reveal that investors make predictions about the decreasing value of goodwill and can efficiently make timely adjustments to its pricing whether the impairments have been delayed or not, indicating that investors believe the acquired goodwill itself deteriorates regardless of goodwill impairment. We also provide evidence on the impact of Statements of Financial Accounting Standards (SFAS) 141(R) on investors’ perceptions of acquired assets. We find that SFAS 141(R) increases investors’ long-term valuation of other acquired intangible assets but negatively impacts goodwill’s market valuation in the post- acquisition periods. Our findings provide insights that may be useful to accounting standards- setting bodies in improving reporting guidelines related to goodwill and other intangible assets.

Authors

• Shin Hyoung Kwon, Penn State University - Erie

• Guannan Wang, Suffolk University