Accounting for business combinations: Do purchase price allocations matter?

Luc Paugam, Pierre Astolfi () and Olivier Ramond
Additional contact information
Luc Paugam: ESSEC Business School
Pierre Astolfi: IRG - Institut de Recherche en Gestion - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12
Olivier Ramond: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: This study investigates the informativeness of purchase price allocations (PPAs) that involve fair value estimation of acquired assets and liabilities after a business combination. Using a model capturing the amount of goodwill expected after the initial announcement of an acquisition, we examine how allocation of abnormal levels of purchase price to goodwill (Abnormal Goodwill) affects stock price reaction surrounding the first disclosure of the PPA in SEC filings, and the acquirer's future performance. From a sample of 308 economically significant U.S. business combinations completed between 2002 and 2011, we document the following results: (1) Abnormal Goodwill is negatively associated with cumulative abnormal returns surrounding the first disclosure of the PPA, (2) there is a stronger negative reaction to Abnormal Goodwill for acquisitions that were already negatively received by market participants when initially announced than for acquisitions that were initially received positively, (3) the frequency and magnitude of goodwill impairment during the three years following completion of the acquisition increases as Abnormal Goodwill increases, and (4) future performance decreases as Abnormal Goodwill increases. Overall, our findings indicate that Abnormal Goodwill is informative regarding the quality of acquisitions. This study contributes to the debate on the usefulness of PPA.

Keywords: Purchase Price Allocation (PPA); Market Expectations; Abnormal Goodwill; Business Combination (search for similar items in EconPapers)
Date: 2015
Note: View the original document on HAL open archive server: https://hal.science/hal-01277376v1
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Citations: View citations in EconPapers (10)

Published in Journal of Accounting and Public Policy, 2015, 34 (4), ⟨10.1016/j.jaccpubpol.2015.04.003⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01277376

DOI: 10.1016/j.jaccpubpol.2015.04.003

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