Externalities of Fair Value Estimate of Technology Related Intangibles: Evidence from Business Combination

Project: Research

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Description

Intangibles such as patents, know-how, trade secrets, developed and in-process technology (collectively tech-intangibles henceforth), generated from research and development efforts, are a primary driver of firm value in the modern knowledge economy. Yet, the current accounting system does not recognize their value (when internally generated) unless acquired through a mergers and acquisition (M&A) transaction. Hence, investors and analysts have argued that the current standards do not provide enough information about the value of tech-intangibles, making it difficult to value technology-intensive firms. However, given the lack of reliable fair value information, recognition of such items is challenging. Facing increasing information demand from investors about tech-intangibles, standard setters have called for more academic research to show direct evidence that recognizing (or disclosing) the value of tech-intangibles, would be useful for investors’ decision-making. However, due to limited data availability, rather limited research has directly examined this issue. To fill this void, this study aims to shed more light on the decision usefulness of the fair value of tech-intangibles. Specifically, I exploit a mandatory disclosure post M&A, wherein the acquirer discloses the post-deal recognition of the fair value of the target’stech-intangibles. While prior research primarily focuses on the decision usefulness of accounting information to a firm’s own investors and managers, I take a different approach and investigate this issue from the perspective of the investors and managers of peer firms. First, I study if investors of peers technologically similar to the target find the fair value of the target’s tech-intangibles incrementally informative beyond other accounting and non-accounting signals of the value of these items. Second, I investigate if the managers of the peer firms use the fair value of the tech-intangibles in their investment decisions regarding which area(s) of technology to invest in. This study responds to the call of standard setters for more academic research to provide direct evidence of whether and how information about the value of tech-intangibles is used by financial statement users. Furthermore, this study speaks to two interrelatedimportant debates in accounting literature, (i) recognition (or disclosure) of intangibles (ii) usefulness of fair value accounting by examining the decision usefulness of fair value estimates of tech-intangibles. Lastly, this study extends the literature onaccounting information transfer, which has traditionally focused on earnings announcements, and the literature on the real effects of accounting information, which has primarily focused on investments in general but not on tech-specific policies. 

Detail(s)

Project number9048249
Grant typeECS
StatusNot started
Effective start/end date1/01/23 → …