Bargain Purchase Gains and the Acquisitions of Failed Banks

32 Pages Posted: 5 Apr 2011

See all articles by Kimberly Dunn

Kimberly Dunn

Florida Atlantic University - School of Accounting

Mark J. Kohlbeck

Florida Atlantic University - School of Accounting

Thomas Joseph Smith

Florida Atlantic University - School of Accounting

Date Written: April 1, 2011

Abstract

In December 2007, the FASB revised accounting for business combinations and permitted firms to record a bargain purchase gain within current earnings at the completion of a business combination. Although the FASB contends that the new treatment improves the representational faithfulness of the acquirers’ current earnings, the ability to recognize a gain in current net income creates a contemporaneous opportunity for earnings management. We use a sample of 2009 FDIC-assisted bank acquisitions to examine the unintended and intended consequences of the revised standard. Despite finding evidence consistent with firms recognizing the gain to avoid reporting earnings declines, we find that the market values the gain similar to other transitory items. Overall, our findings provide support for the FASBs decision to recognize a gain associated with business combinations in current earnings.

Keywords: Goodwill, Bargain Purchase Gain, Earnings Management, Value Relevance

JEL Classification: D46, G21, G28, G34, M41

Suggested Citation

Dunn, Kimberly A. and Kohlbeck, Mark J. and Smith, Thomas Joseph, Bargain Purchase Gains and the Acquisitions of Failed Banks (April 1, 2011). Available at SSRN: https://ssrn.com/abstract=1800883 or http://dx.doi.org/10.2139/ssrn.1800883

Kimberly A. Dunn

Florida Atlantic University - School of Accounting ( email )

University Tower
220 SE 2 Avenue
Boca Raton, FL 33431
United States
561-297-3643 (Phone)

Mark J. Kohlbeck

Florida Atlantic University - School of Accounting ( email )

777 Glades Avenue
KH 119
Boca Raton, FL 33431-0991
United States
561-297-1363 (Phone)

Thomas Joseph Smith (Contact Author)

Florida Atlantic University - School of Accounting ( email )

777 Glades Road
KH 123
Boca Raton, FL 33431
United States

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