Overbidding in Mergers and Acquisitions: An Accounting Perspective
49 Pages Posted: 29 Sep 2017 Last revised: 18 Apr 2020
Date Written: April 7, 2020
Does accounting regime play a role in the well-documented phenomenon of overbidding in M&As? The 2001 regulatory change from a goodwill amortization to a non-amortization regime (SFAS 142) affords us a quasi-experimental setting for testing the consequences of M&A accounting rules for acquirers’ bidding decisions. Relying on a novel approach to modeling optimal bidding, our primary finding indicates a significant increase in overbidding in the post-2001 period, suggesting that M&A accounting has real consequences for bidding decisions, and that this result is robust to a battery of sensitivity tests. In addition, supplementary tests show that overbidding is more pronounced in pooling versus purchase transactions, and that the accounting regime’s implications for overbidding and acquisition premium are distinct. Overall, our findings shed light on the role accounting plays in shaping managerial decisions—and ultimately shareholder wealth—in an important corporate setting. They may thus inform researchers, corporate boards, and standards setters.
Keywords: Overbidding, Mergers and Acquisitions, Goodwill, SFAS No. 141, SFAS No. 142
JEL Classification: M41, G34
Suggested Citation: Suggested Citation