Nir Yehuda

The mispricing of cash flows and accruals at different life-cycle stages

This paper employs the firm life-cycle concept to extend our understanding of the mispricing of accrual and cash flow information by the stock market. We find that accruals and free cash flows are strongly (negatively) correlated in the maturity and decline stages of a firms life cycle but not in the growth stage, suggesting that they capture unique information in the growth stage of the firms life cycle but more correlated information in the later stages. Consistent with this finding, we show that the cash flows anomaly subsumes the accruals anomaly in maturity and decline stages, but not in the growth stage. Our findings contribute to the debate regarding the overlap between the two anomalies

Cost Stickiness, Adjustment Costs and Value Creation in M&A Deals

We examine the association of asymmetric cost behavior of acquirers and value creation in mergers and acquisitions (M&A). We find that less sticky acquirers — that is, acquirers with greater resource-adjustment flexibility — earn higher abnormal returns around the acquisition announcement, consistent with greater flexibility facilitating better target integration. We then show that acquirers with greater resource-adjustment flexibility acquire more-intangible-intensive targets, suggesting that their resource-adjustment flexibility allows them to better integrate acquired intangibles. In additional tests, we do not find evidence of an increase in cost-stickiness in the long window around the acquisition. Collectively, the evidence suggests that good acquirers (a) have greater flexibility in resource decisions and (b) purchase more intangible-intensive targets, which likely enables the acquirers to increase long-term abnormal profitability.

Do Acquisitions of Private Targets Create Higher Value

Acquirers, on average, earn higher announcement-period returns when their targets are privately held than when their targets are publicly traded. We show that private targets have significantly more intangible assets than do public targets. We then develop a valuation model that is based on the fair values of the targets’ tangible and intangible assets and demonstrate that relative to public targets, private targets, while commanding higher premiums over their stand-alone values, also generate higher synergies in the acquisitions. However, the higher synergies in private target acquisitions are not the result of the target status but are driven by the larger amount of intangible assets acquired in those deals. We also find that the variance of synergies in private targets is much larger than that in acquisitions of public targets. Finally, our results are robust for known effects such as mode of payment and expected growth.

Do Acquisitions of Private Targets Create Higher Value? The Role of Intangible Assets Acquired

Using a novel dataset that includes estimates of the fair value of the targets’ purchased tangible and intangible assets, we demonstrate that private targets have significantly more intangible assets than do public targets. We then develop a valuation model that is based on the fair values of the targets’ tangible and intangible assets and show that relative to public targets, private targets generate higher synergies in the acquisitions. However, the higher synergies in private target acquisitions are not the result of the target status but are driven by the larger amount of intangible assets acquired in those deals. We also find that the variance of synergies in private targets is much larger than that in acquisitions of public targets. Finally, our results are robust for known effects such as mode of payment and expected growth.

News Content, Investor Misreaction, and Stock Return Predictability

Using a large dataset of news releases, we study instances of investors’ mistaken reaction, or misreaction, to news. We define misreaction as stock prices moving in the direction opposite to the news when it is released. We find that news tone predicts returns in the cross-section only upon the occurrence of misreaction. Stocks that are larger, more liquid, more visible, and more covered, by analysts or by the media, are less likely to exhibit misreaction. On the other hand, the ambiguity and complexity of news content, and variables that proxy for investor distraction, are all associated with more misreaction and greater predictability.