SFAS 142, Conditional Conservatism, and Acquisition Profitability and Risk
50 Pages Posted: 25 Nov 2015
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: Suggested Citation