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The Effects of Anticipated Future Investments on Firm Value: Evidence from Mergers and Acquisitions

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Date
2013
Author
Zhang, Ning
Advisor
Chen, Qi
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Abstract

I examine the long-term valuation consequence of over-investment in mergers and acquisitions (M&As) on acquiring firms through the "anticipation effect," in which forward-looking prices embed investors' expectations about the profitability of firms' potential future acquisitions. Using a sample of 1,451 firms with past acquisition activities, I find that their market valuations depend on both the profitability of their past acquisitions and their current free cash flow. Specifically, among firms with positive free cash flow, those with the worse history of value-destroying acquisitions experience lower market valuations. Among firms with negative free cash flow, the history of value-destroying acquisitions is not systematically associated with firm value. In addition, a significant portion of the discount is from lowered valuation of firms' cash holdings. These findings are consistent with investors forming expectations about the profitability of future possible acquisitions based on the realized performance outcomes of firms' past acquisitions and value these firms accordingly based on the likelihood of engaging in future acquisitions. They also provide empirical support for using observed market prices to proxy for investors' expectations about firms' future investment opportunities.

Type
Dissertation
Department
Business Administration
Subject
Accounting
Finance
Anticipation
Discount
Firm value
Investment
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https://hdl.handle.net/10161/8185
Citation
Zhang, Ning (2013). The Effects of Anticipated Future Investments on Firm Value: Evidence from Mergers and Acquisitions. Dissertation, Duke University. Retrieved from https://hdl.handle.net/10161/8185.
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This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License.

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