Governance and Merger Accounting: Evidence from Stock Price Reactions to Purchase Versus Pooling
41 Pages Posted: 14 Sep 2007
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 percent for acquiring firms that announce pooling transactions. This return differential declines to negative 8 percent 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.
Keywords: Corporate Governance, Business Combinations, Mergers, Pooling of Interests, Timely Loss Recognition
JEL Classification: G12, G14, G34, M41, M44
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