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Purchase Price Allocations: Do they Matter?

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Author Info

  • Pierre Astolfi

    ()
    (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine)

  • Luc Paugam

    ()
    (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine)

  • Olivier Ramond

    ()
    (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine)

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    Abstract

    Standards setters support that purchase price allocations (PPAs) enhance financial statement decision-usefulness whereas academics and practitioners challenge this statement. We test the consequences of the quality of PPAs, subsequent to business combinations, on change in market expectations. Using the concept of abnormal goodwill - as a proxy for PPAs' quality - we test the association between PPAs' quality and analyst forecasts revisions, change in forecasts dispersion, and analysts' accuracy of 200 major U.S. business combinations. We do not find evidence that PPAs' quality have material impact on change in market expectations, suggesting that market participants fail to fully integrate information content of PPAs. Consistently, we provide evidence that PPAs' quality enables to generate a profitable investment strategy as cumulated abnormal returns can be systematically generated based on abnormal goodwill recognized in PPAs.

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    File URL: http://halshs.archives-ouvertes.fr/docs/00/67/16/11/PDF/Paper_APR_v10-02-2012.pdf
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    Bibliographic Info

    Paper provided by HAL in its series Post-Print with number halshs-00671611.

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    Date of creation: 09 May 2012
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    Publication status: Published - Presented, European Accounting Association (EAA) 2012 annual meeting, 2012, Ljubljana, Slovenia
    Handle: RePEc:hal:journl:halshs-00671611

    Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00671611
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    Web page: http://hal.archives-ouvertes.fr/

    Related research

    Keywords: Purchase Price Allocation; Market Expectations; Abnormal Goodwill; Business Combination;

    This paper has been announced in the following NEP Reports:

    References

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    1. Chandra Kanodia & Haresh Sapra & Raghu Venugopalan, 2004. "Should Intangibles Be Measured: What Are the Economic Trade-Offs?," Journal of Accounting Research, Wiley Blackwell, vol. 42(1), pages 89-120, 03.
    2. Ramanna, Karthik, 2008. "The implications of unverifiable fair-value accounting: Evidence from the political economy of goodwill accounting," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 253-281, August.
    3. Henning, Steven L & Shaw, Wayne H, 2003. " Is the Selection of the Amortization Period for Goodwill a Strategic Choice?," Review of Quantitative Finance and Accounting, Springer, vol. 20(4), pages 315-33, June.
    4. Subramanyam, K. R., 1996. "The pricing of discretionary accruals," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 249-281, October.
    5. Asquith, Paul & Mikhail, Michael B. & Au, Andrea S., 2005. "Information content of equity analyst reports," Journal of Financial Economics, Elsevier, vol. 75(2), pages 245-282, February.
    6. Holthausen, Robert W. & Watts, Ross L., 2001. "The relevance of the value-relevance literature for financial accounting standard setting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 3-75, September.
    7. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
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