Overbidding in Mergers and Acquisitions: The Unintended Accounting Effect
64 Pages Posted: 29 Sep 2017 Last revised: 10 May 2018
Date Written: May 4, 2018
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: Suggested Citation