Can Deal Failure Be Predicted?

We utilize a hand-collected measure of extreme deal failure, the impairment of acquisition goodwill, to examine whether realized value destruction is detected by the market at deal announcement. On average, acquirer announcement returns have only moderate power in forecasting the probability and poor power in forecasting the magnitude of impairment. They also poorly forecast other ex-post symptoms of deal failure – CEO turnover, poor stock and operating performance, and distressed delisting. Detection is better for large deals, large acquirers, and public target transactions. Our evidence suggests that deal failure may be largely triggered by latent factors that are unknown at deal announcement.