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
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: Suggested Citation
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