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Acquisition profitability and timely loss recognition

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  • Francis, Jere R.
  • Martin, Xiumin
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    Abstract

    We investigate if timely loss recognition is associated with acquisition-investment decisions. Using a Basu (1997) piece-wise linear regression model, we find that firms with more timely incorporation of economic losses into earnings make more profitable acquisitions, measured by the bidder's announcement returns and by changes in post-acquisition operating performance. These firms are also less likely to make post-acquisition divestitures (consistent with better ex ante investment decisions), but act more quickly to divest. We also find that the positive association between timely loss recognition and acquisition profitability is more pronounced for firms with higher ex ante agency costs.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 49 (2010)
    Issue (Month): 1-2 (February)
    Pages: 161-178

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    Handle: RePEc:eee:jaecon:v:49:y:2010:i:1-2:p:161-178

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    Web page: http://www.elsevier.com/locate/jae

    Related research

    Keywords: Timely loss recognition Agency costs Accounting conservatism Corporate governance Acquisitions Divestitures;

    References

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    Citations

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    Cited by:
    1. Ramalingegowda, Santhosh & Yu, Yong, 2012. "Institutional ownership and conservatism," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 98-114.
    2. Lawrence, Alastair & Sloan, Richard & Sun, Yuan, 2013. "Non-discretionary conservatism: Evidence and implications," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 112-133.
    3. repec:hit:hjbswp:175 is not listed on IDEAS
    4. Francis, Bill & Hasan, Iftekhar & Wu, Qiang, 2013. "The benefits of conservative accounting to shareholders: Evidence from the financial crisis," Research Discussion Papers 8/2013, Bank of Finland.
    5. Hossain, Mahmud & Jain, Pankaj K. & Mitra, Santanu, 2013. "State ownership and bank equity in the Asia-Pacific region," Pacific-Basin Finance Journal, Elsevier, vol. 21(1), pages 914-931.
    6. Armstrong, Christopher S. & Guay, Wayne R. & Weber, Joseph P., 2010. "The role of information and financial reporting in corporate governance and debt contracting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 179-234, December.
    7. Bijan Abedini & Mohammad Hosein Ranjbar & Azadeh Mozaffari, 2014. "Investigating Effect of Accounting Conservatism and Earning Quality on Reaction of Investors to Cash Stocks of Companies Accepted in Tehran Stock Exchange," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(1), pages 331-339, January.
    8. Rahimah Mohamed Yunos Author_Email: rahim221@johor.uitm.edu.my & Malcolm Smith & Zubaidah Ismail & Syahrul Ahmar Ahmad, 2011. "Inside Concentrated Owners, Board Of Directors And Accounting Conservatism," Annual Summit on Business and Entrepreneurial Studies (ASBES 2011) Proceeding 2011-053-178, Conference Master Resources.
    9. Roychowdhury, Sugata & Martin, Xiumin, 2013. "Understanding discretion in conservatism: An alternative viewpoint," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 134-146.
    10. Cheng, Mei & Dhaliwal, Dan & Zhang, Yuan, 2013. "Does investment efficiency improve after the disclosure of material weaknesses in internal control over financial reporting?," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 1-18.

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