The Effects of Anticipated Future Investments on Firm Value: Evidence from Mergers and Acquisitions

37 Pages Posted: 9 Mar 2016

See all articles by Ning Zhang

Ning Zhang

Queen's University, Smith School of Business

Date Written: February 1, 2016

Abstract

I examine the long-term valuation consequence of investment in mergers and acquisitions on acquiring firms through the “anticipation effect,” in which forward-looking prices embed investors’ expectations about the profitability of firms’ future acquisitions. Using a sample of firms with past acquisitions, I find that their market valuations depend on both the profitability of their past acquisitions and their current free cash flow. Among firms with positive free cash flow (when future acquisitions are likely), those with a worse history of value-destroying acquisitions experience lower market valuations. Among firms with negative free cash flow (when future acquisitions are less likely), firm value is not systematically related to acquisition history. These findings are consistent with investors forming expectations about the profitability of future acquisitions based on realized acquisition outcomes and valuing these firms based on their likelihood of making future acquisitions. They also provide support for using observed market prices as a proxy for investors’ expectations about future investment opportunities.

Keywords: Investments, firm value, anticipation, mergers and acquisitions

JEL Classification: M41, G34

Suggested Citation

Zhang, Ning, The Effects of Anticipated Future Investments on Firm Value: Evidence from Mergers and Acquisitions (February 1, 2016). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2734421

Ning Zhang (Contact Author)

Queen's University, Smith School of Business ( email )

Kingston, Ontario K7L 3N6
Canada

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