Resource Adjustment Costs, Cost Stickiness, and Value Creation in M&A Deals

Posted: 8 Feb 2021

See all articles by Youngki Jang

Youngki Jang

University of Nebraska at Omaha

Nir Yehuda

University of Delaware - Accounting & MIS

Date Written: December 21, 2020

Abstract

We examine whether resource adjustment costs, such as installation and disposal costs for fixed assets, or hiring and firing costs for employees, impede value creation in mergers and acquisitions (M&A). We focus on M&A deals because they are major corporate investment decisions. As a proxy for adjustment costs, we use a firm-level measure of cost stickiness. We predict that acquirers with high adjustment costs have less flexibility in restructuring resources following the acquisition and will find it more costly to merge the target firm’s operations. Consistent with this prediction, we find that the acquirer’s adjustment costs are negatively associated with abnormal returns around the acquisition announcement. Additionally, adjustment costs are also negatively associated with deal synergies. Relatedly, we find that acquirers with high adjustment costs purchase targets with high adjustment costs. In accordance with this finding, we show that acquirers with high adjustment costs purchase intangible-intensive targets. Collectively, our results highlight the important implication of adjustment costs in M&A deals for managers and capital market participants.

Keywords: mergers and acquisitions, resource adjustment costs, integration, cost stickiness

JEL Classification: M41, G34, G32

Suggested Citation

Jang, Youngki and Yehuda, Nir, Resource Adjustment Costs, Cost Stickiness, and Value Creation in M&A Deals (December 21, 2020). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3769083

Youngki Jang

University of Nebraska at Omaha ( email )

6708 Pine Street
Omaha, NE 68182-0048
United States

Nir Yehuda (Contact Author)

University of Delaware - Accounting & MIS ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

HOME PAGE: http://https://lerner.udel.edu/faculty-staff-directory/nir-yehuda/

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