Benefits and Costs of Asset Reallocation in Mergers and Acquisitions

49 Pages Posted: 26 Jan 2012 Last revised: 3 Sep 2013

See all articles by Wei-Hsien Li

Wei-Hsien Li

National Central University

John C. Easterwood

Virginia Polytechnic Institute & State University - Pamplin College of Business

Ozgur Ince

University of South Carolina - Moore School of Business

Date Written: August 18, 2013

Abstract

The Q-theory of mergers and acquisitions proposes that takeovers of low-Q targets by high-Q acquirers should be value creating as acquirers redeploy the targets’ assets. Recent evidence on the direct relationship between Q and value creation is mixed. We present a simple model which suggests three modifications to the standard empirical approach. First, we allow for both benefits and costs of integration that are likely to accompany asset reallocation in M&As. Second, we use a modified proxy for the Q ratio in our empirical tests after decomposing the market-to-book ratio – the conventional proxy for Q – into its long-run and short-run components. Third, our model suggests that the correct regression specification requires the weighting of proxies for the benefits and costs of asset reallocation by the relative size of the resources being reallocated. After the modifications, we find evidence consistent with Q-theory using announcement returns and operating performance as alternative measures of value creation. The relation between value creation and Q-difference is inverse U-shaped, indicating a tradeoff between benefits and costs of asset reallocation. We also find that the long- and short-run components of Q relate significantly differently to value creation in M&As.

Keywords: M&As, Valuation, Asset reallocation, Q-theory

JEL Classification: G34, G14

Suggested Citation

Li, Wei-Hsien and Easterwood, John C. and Ince, Ozgur S., Benefits and Costs of Asset Reallocation in Mergers and Acquisitions (August 18, 2013). Available at SSRN: https://ssrn.com/abstract=1991328 or http://dx.doi.org/10.2139/ssrn.1991328

Wei-Hsien Li

National Central University ( email )

No.300, Jung-da Rd.
Jhongli, 32001
Taiwan
886-3-422-7151 66128 (Phone)
886-3-425-2961 (Fax)

John C. Easterwood (Contact Author)

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

Dept. of Finance
Blacksburg, VA 24061
United States
540-231-5904 (Phone)
540-231-4487 (Fax)

Ozgur S. Ince

University of South Carolina - Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States
(803) 777-4905 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
102
Abstract Views
8,087
rank
261,742
PlumX Metrics