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Accounting for business combinations: Do purchase price allocations matter?

Paugam, Luc; Astolfi, Pierre; Ramond, Olivier (2015), Accounting for business combinations: Do purchase price allocations matter?, Journal of Accounting and Public Policy, 34, 4, p. 362–391. 10.1016/j.jaccpubpol.2015.04.003

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Working paper daté de décembre 2014 (285.6Kb)
Type
Article accepté pour publication ou publié
Date
2015
Journal name
Journal of Accounting and Public Policy
Volume
34
Number
4
Publisher
Elsevier
Pages
362–391
Publication identifier
10.1016/j.jaccpubpol.2015.04.003
Metadata
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Author(s)
Paugam, Luc
ESSEC BUSINESS SCHOOL [ESSEC-CENTRE DE RECHERCHE]
Astolfi, Pierre cc
Institut de Recherche en Gestion [IRG]
Ramond, Olivier
Dauphine Recherches en Management [DRM]
Abstract (EN)
This study investigates the informativeness of purchase price allocations (PPAs) that involve fair value estimation of acquired assets and liabilities after a business combination. Using a model capturing the amount of goodwill expected after the initial announcement of an acquisition, we examine how allocation of abnormal levels of purchase price to goodwill (Abnormal Goodwill) affects stock price reaction surrounding the first disclosure of the PPA in SEC filings, and the acquirer’s future performance. From a sample of 308 economically significant U.S. business combinations completed between 2002 and 2011, we document the following results: (1) Abnormal Goodwill is negatively associated with cumulative abnormal returns surrounding the first disclosure of the PPA, (2) there is a stronger negative reaction to Abnormal Goodwill for acquisitions that were already negatively received by market participants when initially announced than for acquisitions that were initially received positively, (3) the frequency and magnitude of goodwill impairment during the three years following completion of the acquisition increases as Abnormal Goodwill increases, and (4) future performance decreases as Abnormal Goodwill increases. Overall, our findings indicate that Abnormal Goodwill is informative regarding the quality of acquisitions. This study contributes to the debate on the usefulness of PPA.
Subjects / Keywords
Purchase Price Allocation (PPA); Market Expectations; Abnormal Goodwill; Business Combination
JEL
G14 - Information and Market Efficiency; Event Studies; Insider Trading
G18 - Government Policy and Regulation
M41 - Accounting

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