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The change in information uncertainty and acquirer wealth losses

Author

Listed:
  • Merle Erickson

    (University of Chicago)

  • Shiing-Wu Wang

    (University of Southern California)

  • X. Frank Zhang

    (Yale School of Management)

Abstract

A large body of literature demonstrates that acquisitions are on average value destroying for the acquirer. We investigate whether the change in the acquirer’s information uncertainty contributes to acquirer wealth losses. Information uncertainty affects the discount rate (the cost of capital), which in turn influences stock price. Our results indicate that acquisitions lead to increases in information uncertainty, as proxied by analysts’ earnings forecast dispersion. We also find that the change in information uncertainty is negatively related to acquirer long-term stock performance, after controlling for the acquirer’s fundamentals. Taken together, this evidence is consistent with the conclusion that increases in information uncertainty resulting from acquisitions contribute to acquirer post-acquisition wealth losses

Suggested Citation

  • Merle Erickson & Shiing-Wu Wang & X. Frank Zhang, 2012. "The change in information uncertainty and acquirer wealth losses," Review of Accounting Studies, Springer, vol. 17(4), pages 913-943, December.
    • Handle: RePEc:spr:reaccs:v:17:y:2012:i:4:d:10.1007_s11142-012-9184-9
    DOI: 10.1007/s11142-012-9184-9
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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