Wealth effects of relative firm value in M&A deals: reallocation of physical versus intangible assets

Debarati Bhattacharya, Wei Hsien Li

Research output: Contribution to journalArticlepeer-review

1 Scopus citations


This paper distinguishes between value creation through redistribution of physical assets and that from intangible assets. We decompose the market-to-book ratio into fundamental value and unexplained components and find that mergers create wealth when high-value firms primarily acquire physical assets from low-value firms. In contrast, deals motivated by transfer of investment opportunities generate wealth when growth-constrained low-value firms acquire substantial intangible assets from high-value targets. By separating the two motives for mergers, we provide empirical evidence of two diametrically opposed effects of relative firm value on wealth gains to shareholders, thus reconciling the conflicting evidence of the ‘high-buys-low’ effect from earlier studies. Concomitantly, our findings also explain the patterns of firm pairings in merger data that run contrary to conventional wisdom. Our empirical framework considers the effects of mispricing, governance, and size of assets reallocated and addresses concerns of selection bias. Additionally, we find evidence of post-merger wealth generation through the acquisition of growth opportunities in the form of intangible asset transfer from a high-value target to a low-value acquirer.

Original languageEnglish
Pages (from-to)1513-1548
Number of pages36
JournalReview of Quantitative Finance and Accounting
Issue number4
StatePublished - 1 Nov 2020


  • Asset reallocation
  • Intangible capital
  • Mergers and acquisitions
  • Q-theory


Dive into the research topics of 'Wealth effects of relative firm value in M&A deals: reallocation of physical versus intangible assets'. Together they form a unique fingerprint.

Cite this