Wealth effects of relative firm value in M&A deals: reallocation of physical versus intangible assets
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Wealth effects of relative firm value in M&A deals: reallocation of physical versus intangible assets Debarati Bhattacharya1 · Wei‑Hsien Li2
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This paper distinguishes between value creation through redistribution of physical assets and that from intangible assets. We decompose the market-to-book ratio into fundamental value and unexplained components and find that mergers create wealth when high-value firms primarily acquire physical assets from low-value firms. In contrast, deals motivated by transfer of investment opportunities generate wealth when growth-constrained lowvalue firms acquire substantial intangible assets from high-value targets. By separating the two motives for mergers, we provide empirical evidence of two diametrically opposed effects of relative firm value on wealth gains to shareholders, thus reconciling the conflicting evidence of the ‘high-buys-low’ effect from earlier studies. Concomitantly, our findings also explain the patterns of firm pairings in merger data that run contrary to conventional wisdom. Our empirical framework considers the effects of mispricing, governance, and size of assets reallocated and addresses concerns of selection bias. Additionally, we find evidence of post-merger wealth generation through the acquisition of growth opportunities in the form of intangible asset transfer from a high-value target to a low-value acquirer.
Previous versions of this paper were circulated under the titles “Benefits and Costs of Asset Reallocation in Mergers and Acquisitions” and “When Do M&As Create Value?” We would like to thank John Easterwood, Ozgur Ince, Dilip Shome, Raman Kumar, Ken Yook, Sjored van Bekkum, Jan Jindra, Jie Michael Guo, and Giang Nguyen for their comments. We wish to thank the seminar participants at National Dong Hwa University, National Central University, National Chung-Hsing University, National Taiwan University, National Chengchi University, Virginia Tech, the 2012 Eastern Financial Association meeting, the 2012 FMA European Conference, the 2013 FMA annual meeting, the 2015 MFA annual meeting, the 16th Conference on the Development of Cross-Strait Financial Markets, and the 27th Annual Conference on Pacific Basin Finance, Economics, Accounting, and Management for comments. We also thank David Cheng-Huan Wu for his able research assistance. Li gratefully acknowledges the financial support from the Ministry of Science and Technology of Taiwan (MOST 107-2410-H-008-027). * Wei‑Hsien Li [email protected] Debarati Bhattacharya [email protected] 1
Department of Finance, Palumbo Donahue Business School, Duquesne University, Pittsburgh, PA 15224, USA
2
Department of Finance, National Central University, No. 300, Jung‑da Rd., Jung‑Li 320, Taiwan, R.O.C.
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Vol.:(0123456789)
D. Bhattacharya, W.-H. Li
Keywords Mergers and acquisitions · Q-theory · Asset reallocation · Intangible capital JEL Classification G34 · G14
1 Introduction and related literature A large body of t
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