Accounting for Business Combinations: Do Purchase Price Allocations Matter?

54 Pages Posted: 13 Jan 2012 Last revised: 15 Jun 2015

See all articles by Luc Paugam

Luc Paugam

HEC Paris, Accounting and Management Control Department

Pierre Astolfi

University Paris-Est Créteil (UPEC)

Olivier J. Ramond

Université Paris Dauphine - CEREG Research Centre

Date Written: December 24, 2014

Abstract

This study investigates the informativeness of purchase price allocations (PPAs) that involve fair value estimation of acquired assets and liabilities after a business combination. Using a model capturing the amount of goodwill expected after the initial announcement of an acquisition, we examine how allocation of abnormal levels of purchase price to goodwill (Abnormal Goodwill) affects stock price reaction surrounding the first disclosure of the PPA in SEC filings, and the acquirer’s future performance. From a sample of 308 economically significant U.S. business combinations completed between 2002 and 2011, we document the following results: (1) Abnormal Goodwill is negatively associated with cumulative abnormal returns surrounding the first disclosure of the PPA, (2) there is a stronger negative reaction to Abnormal Goodwill for acquisitions that were already negatively received by market participants when initially announced than for acquisitions that were initially received positively, (3) the frequency and magnitude of goodwill impairment during the three years following completion of the acquisition increases as Abnormal Goodwill increases, and (4) future performance decreases as Abnormal Goodwill increases. Overall, our findings indicate that Abnormal Goodwill is informative regarding the quality of acquisitions. This study contributes to the debate on the usefulness of PPA.

Keywords: Purchase Price Allocation, Market Expectations, Abnormal Goodwill, Business Combination

JEL Classification: M41, G18, G14

Suggested Citation

Paugam, Luc and Astolfi, Pierre and Ramond, Olivier J., Accounting for Business Combinations: Do Purchase Price Allocations Matter? (December 24, 2014). Journal of Accounting and Public Policy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1984001 or http://dx.doi.org/10.2139/ssrn.1984001

Luc Paugam (Contact Author)

HEC Paris, Accounting and Management Control Department ( email )

1 avenue de la libération
Jouy-en-Josas, 78350
France

Pierre Astolfi

University Paris-Est Créteil (UPEC) ( email )

61 avenue du General de Gaulle
Creteil cedex, 94010
France

Olivier J. Ramond

Université Paris Dauphine - CEREG Research Centre ( email )

Place du Maréchal de Lattre de Tassigny
Paris, 75116
France

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