An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Kathy Hsiao Yu Hsu
University of Louisiana At Lafayette

Kyojik Roy Song
Sungkyunkwan University

Abstract: This study investigates management motivation to write-off In Process Research and Development (IPRD) in mergers and acquisitions. U.S. GAAP provides an accounting arbitrage opportunity for managers by requiring that the portion of acquisition price that is deemed to be IPRD be immediately expensed and any residual amount be charged to goodwill and capitalized. We hypothesize that managers that make value-destroying acquisitions have incentives to write-off IPRD to avoid internal and external disciplinary consequences. Using samples from hi-tech and pharmaceutical mergers and acquisitions completed between 1994 and 2004, we find acquirers that have IPRD write-offs in the year of acquisition have significantly lower announcement period returns than firms that do not have IPRD write-offs. Using multiple regression and logic, we also find that acquirers that experience more negative returns around M&A announcements are more likely to write off IPRD.

Back to Session Listing

AAA Home Page