Purchase, Pooling, and Equity Analysts' Valuation Judgments

Posted: 27 Jun 2000

See all articles by Patrick E. Hopkins

Patrick E. Hopkins

Indiana University - Kelley School of Business - Department of Accounting

Richard W. Houston

University of Alabama

Michael F. Peters

University of Maryland

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Abstract

We provide evidence that analysts' stock-price judgments depend on (1) the method of accounting for a business combination, and (2) the number of years that have elapsed since the business combination. Consistent with business-press reports of managers' concerns, analysts' stock-price judgments are lowest when a company applies the purchase method of accounting and ratably amortizes the acquisition premium. The number of years since the business combination only affects analysts' price estimates when the company applies the purchase method and ratably amortizes goodwill-analyst' price estimates are lower when the business-combination transaction is further in the past. However, this joint effect of accounting method and timing is mitigated by the Financial Accounting Standards Board's proposed income-statement format requiring companies to report separate line items for after-tax income before goodwill charges and net-of-tax goodwill charges. When a company uses the purchase method of accounting and writes off the acquisition premium as in-process research and development, analysts' stock-price judgments are not statistically different from their judgments when a company applies pooling-of-interest accounting.

JEL Classification: M41, M43, M44, M45, G12, G14, G29

Suggested Citation

Hopkins, Patrick E. and Houston, Richard W. and Peters, Michael F., Purchase, Pooling, and Equity Analysts' Valuation Judgments. The Accounting Review, Vol. 75, Issue 3, July 2000. Available at SSRN: https://ssrn.com/abstract=231482

Patrick E. Hopkins (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

Kelley School of Business
1309 E. 10th Street
Bloomington, IN 47405
United States
812-855 2617 (Phone)
812-855 8679 (Fax)

Richard W. Houston

University of Alabama ( email )

Culverhouse School of Accountancy 310 Alston, Box 870220
Tuscaloosa, AL 35487
United States
205-348-8392 (Phone)
205-348-8453 (Fax)

Michael F. Peters

University of Maryland ( email )

Department of Accounting Van Munching Hall
College Park, MD 20742-1815
United States
301-405-7118 (Phone)
301-405-0359 (Fax)

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