The Effect of M&A on the Shift of Investor’s Interest from Earnings to Book Value

• In Event: Financial Accounting and Reporting 1

Abstract

This study examines whether investors change and restore their valuation source that has been shifted from earnings to book values for acquirers in subsequent period after mergers and acquisitions (M&A). As documented in prior literature (Collins, Maydew, and Weiss 1997;.et al. 1997; Chen, DeFond, and Park et al. 2002), investors assign lower weight on earnings if financial information has high complexity or uncertainty. We predict and find that M&A will cause high information uncertainty, and investors will restore the lowered weight on noisy measurement of firm value (earnings) when uncertainty is resolved after M&A. We also find that the value relevance of earnings is primarily replaced by that of the growth component of the book values at M&A consolidation, suggesting that investors shift attention to book values to seek an indication of growth opportunities, not so much of liquidation value in post-M&A period. Furthermore, we find that the shift from earnings to the growth component of book values is more prominent (longer and/or to a greater degree) for acquirers with high M&A uncertainty, specifically acquirers with more intangible assets, high one-time charges, and negative market responses on M&A announcement. These results indicate that M&A bring uncertainty to acquirer’s earnings reporting system, but investors seek an indication of future benefits to acquirers from book values throughout M&A.

Authors

• Shin Hyoung Kwon, Penn State University - Erie

• Guannan Wang, Suffolk University