Overbidding in Mergers and Acquisitions: An Accounting Perspective

49 Pages Posted: 29 Sep 2017 Last revised: 18 Apr 2020

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

Fudan University - School of Economics

Date Written: April 7, 2020

Abstract

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

Bartov, Eli and Cheng, C.S. Agnes and Wu, Hong, Overbidding in Mergers and Acquisitions: An Accounting Perspective (April 7, 2020). 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)

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

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