Accounting Rules and Post-Acquisition Profitability for Business Combinations

Posted: 23 May 2016

See all articles by Victoria Dickinson

Victoria Dickinson

University of Mississippi - Patterson School of Accountancy

Daniel Wangerin

Wisconsin School of Business

John J. Wild

University of Wisconsin - Madison - Department of Accounting and Information Systems

Date Written: May 21, 2016

Abstract

Prior studies report a decline or no change in acquirers' profitability after a merger or business acquisition. Those studies, however, do not consider the downward impact on profitability that stems from use of the "purchase accounting" (and in later periods, "acquisition") method for business combinations. Drawing on financial statement data from both targets and acquirers, we estimate the effects of the application of purchase/acquisition method accounting rules on post-acquisition profitability. We find that recognition rules for acquired inventories, deferred revenues, in-process research and development (IPR&D), and depreciation and amortization expense resulting from writing acquired assets up to fair value vis-á-vis purchase/acquisition accounting methods are all important sources of downward pressure in post-acquisition profitability. We find that investors and analysts appear to recognize the effects of IPR&D in assessing post-acquisition profitability of the combined entity. The findings also suggest that investors and analysts do not appear to fully incorporate the accounting effects related to inventories, deferred revenues, and depreciation and amortization expense for post-acquisition profitability.

Keywords: business combinations, purchase accounting, profitability

JEL Classification: G34, M41

Suggested Citation

Dickinson, Victoria and Wangerin, Daniel D. and Wild, John J., Accounting Rules and Post-Acquisition Profitability for Business Combinations (May 21, 2016). Accounting Horizons, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2782894

Victoria Dickinson

University of Mississippi - Patterson School of Accountancy ( email )

Conner 204C
University, MS 38677
United States
662-915-5448 (Phone)
662-915-7483 (Fax)

Daniel D. Wangerin (Contact Author)

Wisconsin School of Business ( email )

975 University Avenue
4104 Grainger Hall
Madison, WI 53706
United States

John J. Wild

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

Wisconsin School of Business
975 University Avenue / Grainger Hall
Madison, WI 53706
United States
608-262-8122 (Phone)

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