The Effect of Takeovers on the Fundamental Value of Acquirers

Accounting and Business Research, Vol. 40 (4), pp. 333-352, 2010

40 Pages Posted: 27 Jul 2012

See all articles by Paul M. Guest

Paul M. Guest

Kings Business School; University of Cambridge - Centre for Business Research (CBR)

Magnus Bild

affiliation not provided to SSRN

Mikael Runsten

affiliation not provided to SSRN

Date Written: 2010

Abstract

This paper develops a new methodology to examine the financial impact of acquisitions, designed to address whether takeovers yield a positive net present value for the acquiring company. Specifically, we employ the residual income valuation method to compare the fundamental value of the acquiring company before acquisition with the fundamental value after acquisition. We apply this methodology to 303 UK acquisitions completed during 1985-96, and compare the results with the effects of takeover on profitability and short and long run share returns. We find that the impact of acquisition on fundamental value is slightly negative but statistically insignificant. This result differs from the effect of takeover on profitability, which is significantly positive, and the effect of takeover on share returns, which is significantly negative.

Keywords: acquisitions, fundamental value, residual income, profitability, share returns

JEL Classification: G34

Suggested Citation

Guest, Paul M. and Bild, Magnus and Runsten, Mikael, The Effect of Takeovers on the Fundamental Value of Acquirers (2010). Accounting and Business Research, Vol. 40 (4), pp. 333-352, 2010. Available at SSRN: https://ssrn.com/abstract=2118248

Paul M. Guest (Contact Author)

Kings Business School ( email )

Kings College London
Strand
London, London WC2R 2LS
United Kingdom

University of Cambridge - Centre for Business Research (CBR) ( email )

Top Floor, Judge Business School Building
Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Magnus Bild

affiliation not provided to SSRN

Mikael Runsten

affiliation not provided to SSRN ( email )

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