Wealth Effects of Relative Firm Value in M&A Deals: Reallocation of Physical vs Intangible Assets
56 Pages Posted: 4 Nov 2019
Date Written: October 14, 2019
We distinguish between value creation through redistribution of physical assets and that from intangible assets. We decompose the M/B ratio into fundamental value and unexplained components and find that mergers create wealth when high-value firms primarily acquire physical assets from low-value firms. In contrast, deals motivated by transfer of investment opportunities generate wealth when growth-constrained low-value firms acquire substantial intangible assets from high-value targets. By separating the two motives for mergers, we provide empirical evidence of two diametrically opposed effects of relative firm value on wealth gains to shareholders, which reconcile conflicting evidence of the ‘high-buys-low’ effect from earlier studies. Concomitantly, the findings also explain the patterns of firm pairings in merger data that run contrary to conventional wisdom. Our empirical framework considers the effects of mispricing, governance, and size of assets reallocated and addresses concerns of selection bias. Additionally, we find evidence of post-merger wealth generation through acquisition of growth opportunities in the form of intangible asset transfer from a high-value target to a low-value acquirer.
Keywords: Mergers and Acquisitions, Q-theory, Asset reallocation, Intangible capital
JEL Classification: G34, G14
Suggested Citation: Suggested Citation