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Mergers and Acquisitions Accounting and the Diversification Discount
Author(s) -
CUSTÓDIO CLÁUDIA
Publication year - 2014
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12108
Subject(s) - goodwill , diversification (marketing strategy) , mergers and acquisitions , portfolio , business , database transaction , accounting , book value , value (mathematics) , financial economics , enterprise value , market value , economics , monetary economics , finance , earnings , marketing , statistics , mathematics , computer science , programming language
q ‐based measures of the diversification discount are biased upward by mergers and acquisitions and its accounting implications. Under purchase accounting, acquired assets are reported at their transaction value, which typically exceeds the target's pre‐merger book value. Thus, measured q tends to be lower for the merged firm than for the portfolio of pre‐merger entities. Because conglomerates are more acquisitive than focused firms, their q tends to be lower. To mitigate this bias, I subtract goodwill from the book value of assets and a substantial part of the diversification discount is eliminated. Market‐to‐sales‐based measures do not have this bias.