The value-relevance of gains on bargain purchase: do actions speak louder than words?

Abstract

PurposeThis paper investigates whether disclosure quality and a history of overpaying for acquisitions are associated with differences in the value-relevance of gains on bargain purchase with high disclosure prominence.Design/methodology/approachFindings are from multivariate regression results, using a sample of firms listed in South Africa from 2010 to 2019, where a mandatory earnings reconciliation provides high disclosure prominence for gains on bargain purchase.FindingsGiven high disclosure prominence, disclosure quality is not associated with differences in the pricing of gains on bargain purchase. Instead, most gains on bargain purchase are priced as future losses (unrecognised liabilities). However, when a firm has a history of overpaying for acquisitions, gains on bargain purchase are priced as transitory economic gains.Research limitations/implicationsFurther research is required to determine if overpaying for acquisitions similarly communicates the credibility of gains on bargain purchase when disclosure prominence is low.Practical implicationsDisclosure prominence can reduce disclosure processing costs and increase the value-relevance of complex acquisition accounting. High disclosure quality cannot compensate for a weak acquisition track record.Originality/valueFindings deepen our understanding of the pricing of gains on bargain purchase. This paper presents empirical results that reconcile previously conflicting theoretical views of gains on bargain purchase (as unrecognised assets or as unrecognised liabilities), by shedding light on the role that a record of overpaying for acquisitions plays in the value-relevance of gains on bargain purchase.