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Review of Accounting Studies

Erschienen in:

01.06.2016

The effects of anticipated future investments on firm value: evidence from mergers and acquisitions

verfasst von: Ning Zhang

Erschienen in: Review of Accounting Studies | Ausgabe 2/2016

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Abstract

I examine the long-term valuation consequence of investment in mergers and acquisitions on acquiring firms through the “anticipation effect,” in which forward-looking prices embed investors’ expectations about the profitability of firms’ future acquisitions. Using a sample of firms with past acquisitions, I find that their market valuations depend on both the profitability of their past acquisitions and their current free cash flow. Among firms with positive free cash flow (when future acquisitions are likely), those with a worse history of value-destroying acquisitions experience lower market valuations. Among firms with negative free cash flow (when future acquisitions are less likely), firm value is not systematically related to acquisition history. These findings are consistent with investors forming expectations about the profitability of future acquisitions based on realized acquisition outcomes and valuing these firms based on their likelihood of making future acquisitions. They also provide support for using observed market prices as a proxy for investors’ expectations about future investment opportunities.

Vorheriger Artikel Limited attention, statement of cash flow disclosure, and the valuation of accruals

Nächster Artikel Analysts’ pre-tax income forecasts and the tax expense anomaly

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Throughout this paper, I use “acquisitions” and “M&As” interchangeably.

See the full text from Seeking Alpha at http://seekingalpha.com/article/262738-glenview-capital-loves-expedia-and-these-13-super-stocks.

The Compustat mean values of acquisitions, capital expenditure, and R&D between 1989 and 2013 (excluding regulated industries) are $32 million, $131 million, and $36 million, respectively.

Throughout this paper, I use “history of value-destroying acquisitions” and “history of over-investment” interchangeably.

As argued by Richardson (2006), the positive relation between observed investment and observed cash flow may stem from the fact that cash flow is a proxy for investment opportunities (Alti 2003). Richardson overcomes this by incorporating accounting-based measures of growth opportunities and simultaneously estimating investment and free cash flow.

Throughout this paper, I draw inferences about investors’ expectations about the profitability of possible future acquisitions based on the valuation difference—i.e., the difference between firms with histories of value-destroying acquisitions versus those with histories of value-enhancing acquisitions. When having positive free cash flow, firms that have done more value-destroying acquisitions are hypothesized to have lower firm value compared with firms with more value-enhancing acquisitions.

I use at least partially cash-financed deals to calculate Incidence because I use Incidence to capture how a firm spends cash in past acquisitions. This design is consistent with my subsequent analysis using free cash flow to partition firms into likely acquirers and unlikely acquirers to investigate how investors anticipate firm behaviors based on how firms spend cash. As a sensitivity check, I also calculate Incidence using all deals including those financed completely through stock. Results and inferences are similar.

If the interval between two neighboring M&As is less than a year, I calculate BHCAR from the last M&A’s announcement date −2 to 14 days before the next M&A.

I also calculate Incidence as a simple average of negative performance incidence. Results are similar to those reported in all aspects.

As does Richardson (2006), I estimate V _AIP as (1 − αr)BV + α(1 + r)X − α·r·d, where α = ω/(1 + r-ω). ω is the abnormal earnings persistence parameter and takes a value of 0.62. d is annual dividends. X is operating income after depreciation. r is the discount rate and takes a value of 12 %.

Estimation results are very similar to those in Richardson (2006) and are available upon request.

Results and inferences are qualitatively similar if I use alternative windows of [−91, 273] and [0, +365), respectively.

The mechanical relation is unlikely to be the explanation for regressions with control variables, as the firm fundamental variables, as well as the past stock return variable, will pick up the effect of prior stock performance on firm value.

The sample sizes using these two alternative measures of Tobin’s Q are smaller than that in Table 5. This is because when the dependent variable is Tobin’s Q ^{4-to-6 month}, future share prices are needed. As such, some firm years cannot be matched with their future share prices. When the dependent variable is Tobin’s Q ^{Price target}, I conduct the analysis on a subsample with analyst price target forecasts in I/B/E/S.

When the statement of cash flow data are not available before 1988 (the effective year of SFAS No. 98), I impute cash flow from operations as the difference between reported earnings (IB, income before extraordinary items) and accruals calculated using the balance sheet approach (Sloan 1996).

The use of cumulative goodwill write-offs has several limitations. Recent studies (Hayn and Hughes 2006; Li et al. 2011) show that managers bias the timing of goodwill impairments and that goodwill write-offs lag behind the economic impairment of goodwill by an average of three to four years. Muller et al. (2012) provide empirical evidence that corporate insiders benefit from delayed goodwill impairments through abnormal selling of shares.

As I need 10 years of data to calculate Incidence ^{Goodwill write-off} and firms started to report goodwill write-offs in 1996, I conduct the analysis using this goodwill-based measure on a post-2006 subsample.

Even though investors expect firms with positive free cash flow to have a higher likelihood of making acquisitions, the expected probability is below one. As such, the acquisition announcement still contains some news.

As the calculation of Incidence needs 10 years of data, acquisitions in this test start from 1989.

Ai and Norton (2003) caution that the magnitude of the interaction effect in nonlinear models does not equal the marginal effect of the interaction term. I draw inferences from this test primarily from regressions on the positive and negative FCF subsamples.

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Titel: The effects of anticipated future investments on firm value: evidence from mergers and acquisitions
verfasst von: Ning Zhang
Publikationsdatum: 01.06.2016
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 2/2016
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-016-9353-3

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