Acquisition-Related Provision-Taking and Post-Acquisition Performance in the UK Prior to "FRS 7"

This paper examines the association between acquisiton-related provision-taking behaviour and post-acquisition performance for a sample of UK firms that undertook large acquisitions between 1989 and 1995. We find evidence that provision-taking was associated with declining accounting and market-adjusted stock price performance over the three-year period following the fiscal year of the acquisition. This relationship exists after controlling for a variety of factors, including method of payment in the acquisition and post-acquisition cash flow performance. By implication, post-acquisition abnormal returns appear to have been predictable based on publicly available information about the magnitude of the provisions. These findings are consistent with the following scenario: The management of the high provisioners used the provisions to insulate accounting earnings from the effects of declining cash flows. The market belatedly reacted to these firms' declining fortunes when net income was no longer inflated by provision reversals. Copyright Blackwell Publishers Ltd 2000.