Governance and Merger Accounting: Evidence from Stock Price Reactions to Purchase Versus Pooling
Francisco de Asis Martinez-Jerez
University of Notre Dame - Department of Accountancy
European Accounting Review, Vol. 16, No. 4, 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.
Number of Pages in PDF File: 41
Keywords: Corporate Governance, Business Combinations, Mergers, Pooling of Interests, Timely Loss Recognition
JEL Classification: G12, G14, G34, M41, M44
Date posted: September 14, 2007
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