The Change in Information Uncertainty and Acquirer Wealth Losses

48 Pages Posted: 1 Jun 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: June 1, 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: information uncertainty, return, merger, acquisition, cost of capital

JEL Classification: G12, G14, G31, G34, M40, M41

Suggested Citation

Erickson, Merle and Wang, Shiing-wu and Zhang, Frank, The Change in Information Uncertainty and Acquirer Wealth Losses (June 1, 2011). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1856512

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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