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The Effect of SFAS 141 and 142 on the Likelihood and the Form of Financing of Corporate Takeovers

60 Pages Posted: 9 Mar 2012 Last revised: 28 May 2016

Ashiq Ali

University of Texas at Dallas - Naveen Jindal School of Management

Todd D. Kravet

University of Connecticut - Department of Accounting

Date Written: May 26, 2016

Abstract

We investigate the effects of the elimination of the pooling method, under SFAS 141, and of goodwill amortization, under SFAS 142, on the form of acquisition financing and on a firm’s takeover probability. We find that before these accounting rules, target firms’ step-up value is positively associated with the probability of using stock-for-stock as against partial stock financing. Afterwards, this association decreases significantly and is indistinguishable from zero. These results suggest that the pooling method of accounting is a significant determinant of the form of acquisition financing. These rules also led to a greater decrease in takeover probability for firms with larger predicted step-up values, and this effect is less pronounced for firms with more of the predicted step-up value made up of goodwill. These results suggest that both the pooling method and the method for goodwill amortization are significant determinants of takeover probability. Overall, the study uses a natural experiment to provide a novel finding that certain acquisition related accounting methods significantly influence the form of acquisition financing and takeover probability.

Keywords: Form of acquisition financing, Takeover probability, Pooling of interest method, Goodwill amortization method, SFAS 141 and 142

JEL Classification: M41, G32, G34

Suggested Citation

Ali, Ashiq and Kravet, Todd D., The Effect of SFAS 141 and 142 on the Likelihood and the Form of Financing of Corporate Takeovers (May 26, 2016). Available at SSRN: https://ssrn.com/abstract=2018485 or http://dx.doi.org/10.2139/ssrn.2018485

Ashiq Ali

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 West Campbell Road, SM41
Richardson, TX 75080-3021
United States
972-883-6360 (Phone)
972-883-6811 (Fax)

HOME PAGE: http://www.utdallas.edu/~axa042200/

Todd D. Kravet (Contact Author)

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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