Governance and Merger Accounting: Evidence from Stock Price Reactions to Purchase versus Pooling

Abstract

This paper examines the effect of corporate governance on investor reactions to accounting choice in the context of accounting for business combinations. Using a sample of 324 recent stock swap acquisitions I find that, contrary to practitioners' belief that capital markets penalize purchase accounting, the opposite appears to be true; there is a negative and significant differential market reaction of approximately 4% for acquiring firms that announce pooling transactions. This return differential declines to negative 8% for firms with ineffective corporate governance. These findings are consistent with capital markets interpreting the choice of purchase accounting as a signal of management's confidence in the likelihood of a successful merger. This signal is particularly relevant when corporate governance is considered ineffective.

Evidence on the use of unverifiable estimates in required goodwill impairment

“…IndLev is also significantly positively associated with HHI. The absolute 22 The academic evidence on the governance characteristics of pooling versus purchase method acquirers and on the consequences of pooling versus purchase method acquisitions is consistent with the SEC's claim (e.g., Martinez-Jerez, 2008). 23 In untabulated frequency tests, we find none of the discrete explanatory variables used in the multivariate regressions (e.g., Bonus, Delist, InfoAsym, etc.)…”

Firm value and investment policy around stock for stock mergers

“…Our study contributes to a recent stream of empirical evidence on mergers completed during a period of high equity valuations and of inefficient external capital markets during the late 1990s (Olson and Pagano 2005;Moeller et al 2005;Martinez-Jerez 2008;Aggarwal and Zhao 2009). We find that upon the announcement of a stock-for-stock merger, the acquiring firm loses an average value of 1% while the target firm gains about 11%, confirming similar results documented in the literature.…”

Determinants of the Accounting Choice between Alternative Reporting Methods for Interests in Jointly Controlled Entities

“…Recent studies have already provided useful evidence on the consequences of accounting choice in other contexts, like the capitalization of R&D expenditures (Oswald and Zarowin, 2007) and the accounting for business combinations (Martínez-Jerez, 2008). This kind of analysis in the context of JCEs could provide additional insights potentially useful to the international debate on joint ventures accounting.…”