Purchase Price Allocations: Do They Matter?
affiliation not provided to SSRN
Luc J. Paugam
ESSEC Business School; University Paris-Dauphine - DRM Finance
Olivier J. Ramond
Université Paris Dauphine - CEREG research centre
January 3, 2012
CAAA Annual Conference 2012
Standards setters support that purchase price allocations (PPAs) enhance financial statement decision-usefulness whereas academics and practitioners challenge this statement. We test the consequences of the quality of PPAs, subsequent to business combinations, on change in market expectations. Using the concept of abnormal goodwill – as a proxy for PPAs’ quality – we test the association between PPAs’ quality and analyst forecasts revisions, change in forecasts dispersion, and analysts’ accuracy of 200 major U.S. business combinations. We do not find evidence that PPAs’ quality have material impact on change in market expectations, suggesting that market participants fail to fully integrate information content of PPAs. Consistently, we provide evidence that PPAs’ quality enables to generate a profitable investment strategy as cumulated abnormal returns can be systematically generated based on abnormal goodwill recognized in PPAs.
Number of Pages in PDF File: 36
Keywords: Purchase Price Allocation, Market Expectations, Abnormal Goodwill, Business Combination
JEL Classification: M41, G18, G14working papers series
Date posted: January 13, 2012
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