The Persistence and Pricing of Merger-Related Transitory Growth and Its Implications for Growth Anomalies and Asset Pricing Models

57 Pages Posted: 9 Nov 2012 Last revised: 3 Nov 2015

See all articles by Daniel W. Collins

Daniel W. Collins

University of Iowa - Department of Accounting

Jaewoo Kim

University of Oregon - Department of Accounting

Date Written: November 2, 2015

Abstract

Prior literature in accounting and financial economics measures asset growth as year-over-year growth in total assets. Such growth estimates are upward biased when firms engage in mergers and acquisitions. We decompose asset growth into merger-related and organic growth components, and find that merger-related growth is less persistent than organic growth. The merger-related growth is positively associated with analysts’ optimism in earnings forecasts and stock recommendations, and is a strong predictor of future returns. Furthermore, such return predictability is exhibited by firms that do not transparently disclose the merger-related and organic growth components. This finding is consistent with investors with limited attention playing a role in mispricing. Portfolio asset pricing tests reveal that priced risk factors do not explain this growth pricing anomaly. Stocks with high merger-related growth tend to be associated with higher trading costs and arbitrage risk, which contributes to the persistence of this mispricing over time.

Keywords: Market Efficiency; Limited Attention; Asset Growth Anomaly; Asset Pricing Model; Factor Model; Mergers and Acquisitions; Persistence

JEL Classification: M41; G12; G14; G34

Suggested Citation

Collins, Daniel W. and Kim, Jaewoo, The Persistence and Pricing of Merger-Related Transitory Growth and Its Implications for Growth Anomalies and Asset Pricing Models (November 2, 2015). Available at SSRN: https://ssrn.com/abstract=2172843 or http://dx.doi.org/10.2139/ssrn.2172843

Daniel W. Collins (Contact Author)

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0912 (Phone)
319-335-1956 (Fax)

Jaewoo Kim

University of Oregon - Department of Accounting ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

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