The Implications of Unverifiable Fair-Value Accounting: Evidence from the Political Economy of Goodwill Accounting
Harvard University - Harvard Business School
August 13, 2007
MIT Sloan School of Management Research Paper
I study the evolution of Statement of Financial Accounting Standard (SFAS) # 142, which uses unverifiable fair-value estimates to account for acquired goodwill. I find evidence consistent with the Financial Accounting Standards Board (FASB) issuing SFAS 142 in response to political pressure over its proposal to abolish pooling accounting: pro-pooling firms can be linked via political contributions to U.S. Congresspersons pressuring the FASB on this issue. This result is interesting given the proposal to abolish pooling was due in part to the Securities and Exchange Commission's concerns over pooling misuse. I also find evidence consistent with lobbying support for SFAS 142 increasing in firms' discretion under the standard. Agency theory predicts this unverifiable discretion will be used opportunistically. The results highlight the potential costs of unverifiable fair-value accounting.
Number of Pages in PDF File: 59
Keywords: Accounting, fair values, politics, standard setting
JEL Classification: D72, M41, M43, M44, M49
Date posted: March 13, 2006
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