Overbidding in Mergers and Acquisitions: The Unintended Accounting Effect

64 Pages Posted: 29 Sep 2017 Last revised: 10 May 2018

See all articles by Eli Bartov

Eli Bartov

NYU Stern School of Business

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance

Hong Wu

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: May 4, 2018

Abstract

This paper studies the role the accounting regime plays in overbidding in M&A. The 2001 regulatory change from a goodwill amortization to a non-amortization regime (SFAS 142) affords us a quasi-experimental setting to test the consequences of M&A accounting rules for acquirers’ bidding decisions. Following a recent paper that developed a novel approach to model optimal bidding and to derive a measure for overbidding, we find a significant increase in overbidding in the post-2001 period, suggesting that M&A accounting has an unintended real consequence for bidding decisions. We also find that overbidding is higher for transactions using the pooling-of-interests method than for those using the purchase method in the pre-2001 period, corroborating our main findings that accounting rules contribute to overbidding. Overall, our findings suggest that M&A accounting has unintended consequences for acquirers’ overbidding, which decreases acquirers’ shareholder wealth; they may thus inform corporate boards and accounting standards setters.

Keywords: Overbidding, Mergers and Acquisitions, Goodwill, SFAS No. 141, SFAS No. 142

JEL Classification: M41

Suggested Citation

Bartov, Eli and Cheng, C.S. Agnes and Wu, Hong, Overbidding in Mergers and Acquisitions: The Unintended Accounting Effect (May 4, 2018). Available at SSRN: https://ssrn.com/abstract=3044158 or http://dx.doi.org/10.2139/ssrn.3044158

Eli Bartov

NYU Stern School of Business ( email )

44 W. 4th Street, Suite 10-96
New York, NY 10012
United States
212.998.0016 (Phone)

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Hong Wu (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

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