SFAS 142, Conditional Conservatism, and Acquisition Profitability and Risk

50 Pages Posted: 25 Nov 2015

See all articles by Matthew C. Cedergren

Matthew C. Cedergren

Santa Clara University

Baruch Lev

New York University - Stern School of Business

Paul Zarowin

New York University (NYU) - Department of Accounting

Date Written: November 24, 2015

Abstract

We reexamine the relationship between accounting conservatism and the profitability and risk of acquisitions, by comparing acquisition-related profitability and risk before and after SFAS 142 (2001). SFAS 142 eliminated the periodic amortization of goodwill, replacing it with an annual fair value test for impairment with write-offs if necessary, and required that a firm’s goodwill be allocated to its reporting units. Subsequently, the frequency of goodwill impairments increased, suggesting that SFAS 142 resulted in an increase in conditional conservatism, as firms were now forced to recognize losses that would have been deferred as periodic expenses under the previous gradual amortization regime. Using both market- and accounting-based measures, we find a decrease in both acquisition profitability and risk in the post-SFAS 142 period, relative to acquisitions pre-SFAS 142. By contrast, Canadian firms, which were not affected by SFAS 142, did not experience such changes. Thus, our results suggest that conditional conservatism is associated with decreased risk taking but is not associated with increased acquisition profitability. More generally, our results call into question the benefits of conditional conservatism that have been documented in the literature.

Keywords: Conditional conservatism, goodwill, SFAS 142, acquisition profitability

JEL Classification: M41, G34

Suggested Citation

Cedergren, Matthew C. and Lev, Baruch Itamar and Zarowin, Paul, SFAS 142, Conditional Conservatism, and Acquisition Profitability and Risk (November 24, 2015). Available at SSRN: https://ssrn.com/abstract=2695055 or http://dx.doi.org/10.2139/ssrn.2695055

Matthew C. Cedergren (Contact Author)

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

Baruch Itamar Lev

New York University - Stern School of Business ( email )

40 West 4th Street, Suite 400
New York, NY 10012
United States
212-998-0028 (Phone)
212-995-4001 (Fax)

HOME PAGE: http://www.baruch-lev.com

Paul Zarowin

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
422 Tisch Hall
New York, NY 10012-1118
United States
212-998-0015 (Phone)
212-995-4004 (Fax)

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