Fair Value Accounting and Firm Indebtedness – Evidence from Business Combinations Under Common Control

57 Pages Posted: 1 Apr 2015 Last revised: 1 Mar 2019

See all articles by Massimiliano Bonacchi

Massimiliano Bonacchi

Free University of Bolzano - Faculty of Economics and Management; New York University (NYU) - Department of Accounting

Antonio Marra

Bocconi University - Department of Accounting

Ron Shalev

University of Toronto - Rotman School of Management

Date Written: March 30, 2015

Abstract

We analyze a choice that parent firms face under IFRS: whether to account a business combination under a common control (BCUCC) at fair value or at the historical cost, to provide evidence that firms would use fair value when they believe it would help them issuing public debt. A BCUCC is a merger of two entities owned by the same parent firm. Although most of BCUCCs do not materially change the composition and the market value of parent firm’s assets and liabilities, they can significantly reduce accounting leverage of the parent firm if recorded at fair value. We find that parent firms are more likely to record BCUCCs at fair value when their pre-BCUCC leverage is high and when they have net worth covenants on their debt. Using a propensity score to match firms that used fair value to account for a BCUCC with similar firms that did not conduct a BCUCC, we find that the former are more likely to issue new public debt following the BCUCC.

Keywords: Accounting choices; fair value accounting; balance sheet leverage; indebtedness

JEL Classification: M41

Suggested Citation

Bonacchi, Massimiliano and Marra, Antonio and Shalev, Ron, Fair Value Accounting and Firm Indebtedness – Evidence from Business Combinations Under Common Control (March 30, 2015). Available at SSRN: https://ssrn.com/abstract=2587270 or http://dx.doi.org/10.2139/ssrn.2587270

Massimiliano Bonacchi

Free University of Bolzano - Faculty of Economics and Management ( email )

Universitätsplatz, 1
Bozen-Bolzano, BZ 39100
Italy
+39 0471 013290 (Phone)

HOME PAGE: http://www.unibz.it/en/economics/people/StaffDetails.html?personid=35968&hstf=35968

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://www.stern.nyu.edu/faculty/bio/massimiliano-bonacchi

Antonio Marra

Bocconi University - Department of Accounting ( email )

Via Roentgen 1
Milan, 20136
Italy

Ron Shalev (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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