Information Uncertainty and Acquirer Wealth Losses

48 Pages Posted: 21 Nov 2007 Last revised: 24 Feb 2011

See all articles by Merle Erickson

Merle Erickson

University of Chicago - Booth School of Business

Shiing-wu Wang

University of Southern California - Leventhal School of Accounting

Frank Zhang

Yale School of Management

Date Written: February 22, 2011

Abstract

A large body of literature demonstrates that acquisitions are on average value-destroying for the acquirer. We investigate whether the change in the acquirer’s information uncertainty contributes to acquirer wealth losses. Information uncertainty affects the discount rate (the cost of capital), which in turn influences stock price. Our results indicate that acquisitions lead to increases in information uncertainty, as proxied by analysts’ earnings forecast dispersion. We also find that the change in information uncertainty is negatively related to acquirer long-term stock performance, after controlling for the acquirer’s fundamentals. Taken together, the evidence is consistent with the conclusion that increases in information uncertainty resulting from acquisitions contribute to acquirer post-acquisition wealth losses.

Keywords: Merger, acquisition, cost of capital, uncertainty, return

JEL Classification: G14, G24, G29, G34, D82

Suggested Citation

Erickson, Merle and Wang, Shiing-wu and Zhang, Frank, Information Uncertainty and Acquirer Wealth Losses (February 22, 2011). Available at SSRN: https://ssrn.com/abstract=1031544 or http://dx.doi.org/10.2139/ssrn.1031544

Merle Erickson

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-0716 (Phone)
773-702-0458 (Fax)

Shiing-wu Wang

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-5012 (Phone)
213-747-2815 (Fax)

Frank Zhang (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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