The Relation Among Targets' R&D Activities, Acquirers' Returns, and In-Process R&D in the U.S.

Journal of Business, Finance, & Accounting, Vol. 36, pp. 1180-1200, 2009

36 Pages Posted: 9 May 2009 Last revised: 13 Nov 2009

See all articles by Kathy Hsiao Yu Hsu

Kathy Hsiao Yu Hsu

University of Louisiana at Lafayette - Department of Accounting

Young Sang Kim

Northern Kentucky University - Haile/US Bank College of Business

Kyojik "Roy" Song

Sungkyunkwan University

Date Written: May 8, 2009

Abstract

Using a sample of 129 mergers and acquisitions (M&As) in the U.S. between publicly traded acquirers and targets in research and development (R&D) intensive industries over the period of 1994-2004 and a size- and industry-matched sample, we examine the relation among targets' R&D activities, the probability of acquirers' writing-off in-process R&D (IPRD), and acquirers' returns around the time of M&A announcements. We find that firms acquiring targets with higher research and development investments tend to write off some of the acquired R&D assets upon the completion of the M&As. We also find that the median cumulative abnormal return during the three days around M&A announcements for acquirers with subsequent IPRD write-offs is -2.73 percent while the return for acquirers without IPRD write-offs is -0.60 percent. This suggests that acquirers' stock returns around M&A announcements are much lower when investors expect acquirers to expense IPRD. The results are consistent with our conjecture that acquirers tend to write-off IPRD when they acquire overvalued targets. We also find that IPRD write-offs do not increase earnings or stock returns of acquirers after M&As, which is inconsistent with an earnings management hypothesis.

Keywords: Mergers and acquisitions, in-process R&D (IPRD), acquirers' returns

JEL Classification: G34, G38, M41

Suggested Citation

Hsu, Kathy Hsiao Yu and Kim, Young Sang and Song, Kyojik "Roy", The Relation Among Targets' R&D Activities, Acquirers' Returns, and In-Process R&D in the U.S. (May 8, 2009). Journal of Business, Finance, & Accounting, Vol. 36, pp. 1180-1200, 2009, Available at SSRN: https://ssrn.com/abstract=1401649

Kathy Hsiao Yu Hsu

University of Louisiana at Lafayette - Department of Accounting ( email )

P.O. Box 43450
Lafayette, LA 70504-3450
United States

Young Sang Kim (Contact Author)

Northern Kentucky University - Haile/US Bank College of Business ( email )

Dept of Economics and Finance
Highland Heights, KY 41099
United States
859-572-5160 (Phone)
859-572-6627 (Fax)

Kyojik "Roy" Song

Sungkyunkwan University ( email )

53 Myeongnyun-dong 3-ga Jongno-ju
Guro-gu
Seoul, 110-745
Korea, Republic of (South Korea)

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