The Mediating Effect of Profitability on the Relationship Between Business Combination and Firm Value Using Partial Least Squares – Structural Equation Modeling

Business combinations, commonly known as mergers and acquisitions (M&As), are becoming significant transactions of local and global economies as they continually happen necessitating huge amount of resources. While some business combinations succeeded, other deals however failed. As such, this paper generally explores the relationship between business combination and firm value. It specifically studies the effect of business combination on firm value and on profitability and the effect of profitability on firm value. It then further investigates the mediating effect of profitability on such relationship. Using explanatory research design, it applies total enumeration sampling method to include only 25 Philippine publicly listed companies that underwent completed merger and acquisition excluding those firms of financial nature and of incomplete data. Further, it utilizes their annual reports for the three years before and after the year of business combination, thus it deals with 175 samples. Employing PLS-SEM, it establishes that business combination has significant negative effect on firm value and has significant positive effect on profitability. It also reveals that profitability has no significant effect on firm value and does not mediate the relationship between business combination and firm value