Speculative Components in M&A Purchase Prices, Acquirers’ Long-Term Performance, and Goodwill Estimation

48 Pages Posted: 19 Oct 2016 Last revised: 31 Mar 2018

See all articles by Hyung Il Oh

Hyung Il Oh

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Date Written: March 26, 2018

Abstract

This study proposes and estimates a fundamental-analysis-based approach to identifying speculative components in merger and acquisition (M&A) purchase prices. I estimate the speculative component of the price as the portion that cannot be explained by the book value of the target plus a multiple of the target’s current earnings. I find that purchase prices that include a larger speculative component are negatively associated with future long-term returns. I also document that the speculative component of M&A prices is positively associated with future goodwill impairments. The results imply that the proposed approach helps predict the performance consequences of speculative M&A and provides an alternative framework for interpreting and evaluating goodwill.

Keywords: Goodwill accounting, Mergers and acquisitions, Valuation, Residual earnings model

JEL Classification: G32, G34, M41

Suggested Citation

Oh, Hyung Il, Speculative Components in M&A Purchase Prices, Acquirers’ Long-Term Performance, and Goodwill Estimation (March 26, 2018). Available at SSRN: https://ssrn.com/abstract=2853864 or http://dx.doi.org/10.2139/ssrn.2853864

Hyung Il Oh (Contact Author)

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 02455
Korea, Republic of (South Korea)

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