|
Archive@NYU >
Stern School of Business >
Accounting Working Papers >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27476
|
| Title: | Investor Sentiments, Ill-Advised Acquisitions and Goodwill Impairment |
| Authors: | Gu, Feng
Lev, Baruch |
| Issue Date: | May-2008 |
| Series/Report no.: | Baruch Lev-16 |
| Abstract: | We hypothesize that the root cause of many goodwill write-offs -
managers' public admission of ill-advised corporate acquisitions - is
the overpriced shares of buyers at acquisition. Overpriced shares
provide managers with strong incentives to invest, and particularly to
acquire businesses, even at excessive prices and doubtful strategic fit,
in order to "buy themselves out" of the overpriced share
predicament and postpone the inevitable price correction by portraying
continued growth. We corroborate our hypothesis by documenting: (1)
share overpricing is strongly and positively associated with the
intensity of corporate acquisitions, (2) share overpricing is negatively
related to the post-acquisition share performance of buyers, beyond the
price correction, indicating a negative relation between overpricing and
the quality of acquisitions, (3) share overpricing is positively related
to the size of goodwill write-offs. We further show that share
overpricing predicts both goodwill write-offs and their magnitude, and
that acquisition by overpriced companies is a losing proposition for
shareholders. Finally, we document some of the serious private and
social consequences of the ill-advised acquisitions made by overpriced
firms. These findings contribute to the accounting literature on
business combinations and goodwill, as well as to the finance/economics
research on investor sentiments and corporate investment |
| URI: | http://hdl.handle.net/2451/27476 |
| Appears in Collections: | Accounting Working Papers
|
All items in Faculty Digital Archive are protected by copyright, with all rights reserved.
|
