The Relation Among Targets’ R&D Activities, Acquirers’ Returns, and In‐Process R&D in the US

Using a sample of 129 mergers and acquisitions (M&As) in the US 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 R&D 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% while the return for acquirers without IPRD write‐offs is −0.60%. 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.