Market Reactions to Accounting Policy Choices for Mergers and Acquisitions: Evidence for the Japanese Adoption of International Accounting Standards

Posted: 10 Oct 2010

See all articles by Tadanori Yosano

Tadanori Yosano

Kobe University - Graduate School of Business Administration

Yoshinori Shimada

Saitama University

Date Written: October 8, 2010

Abstract

The purpose of this paper is to explore, through M&As accounting policies, whether the Japanese adoption of IFRS is favorable for market participants. M&As are excellent prototypes for this study, because they have a substantial impact upon firms’ financial statements. Additionally, Japanese M&A accounting standards still maintain the amortization period within twenty years, which is practical in creating a sharp contrast comparison with the impairment approach outlined by the IFRS 3 and SFAS141/142.

We focus on how the recognition and implementation of three different measurement rules, such as the pooling-of-interests, purchase with the amortization of goodwill, and purchase with the immediate expensing of goodwill, influence investors’ interpretations of earning numbers. First, we found that investors interpreted earning figures congruently despite the different accounting policies used. This phenomenon is consistent with the functional fixation hypothesis, which suggests that investors are bottom-line oriented. Second, we found that acquiring firms’ who choose to expense entire goodwill values within the current fiscal year in order to alleviate investors’ concerns that the M&A would negatively impact bottom-line earnings, and we have found that this is done successfully, convincing investors to regard the immediate write-off as an irrelevant item to the firm’s future earnings. The immediate write-off deserves our attention, because it yields the same future bottom-line earnings as firms who use the purchase with impairment method prescribed in IFRS 3 and SFAS 141/142.

Keywords: Mergers and Acquisitions, Purchase method, Pooling-of-interests method, Goodwill, Amortization, IFRS adoption

JEL Classification: G34, M41

Suggested Citation

Yosano, Tadanori and Shimada, Yoshinori, Market Reactions to Accounting Policy Choices for Mergers and Acquisitions: Evidence for the Japanese Adoption of International Accounting Standards (October 8, 2010). Available at SSRN: https://ssrn.com/abstract=1689448 or http://dx.doi.org/10.2139/ssrn.1689448

Tadanori Yosano (Contact Author)

Kobe University - Graduate School of Business Administration ( email )

2-1 Rokkodai-cho
Nada-ku
Kobe, Hyogo 657-8501
Japan
+81-78-803-7256 (Phone)
+81-78-803-6969 (Fax)

Yoshinori Shimada

Saitama University ( email )

Shimo-Okubo 255, Sakura
Saitama, 338-8570
Japan

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