The Effect of Fair Value Accounting on Firm Public Debt – Evidence from Business Combinations under Common Control

European Accounting Review

49 Pages Posted: 1 Apr 2015 Last revised: 5 Feb 2024

See all articles by Massimiliano Bonacchi

Massimiliano Bonacchi

Free University of Bolzano - Faculty of Economics and Management; Stern School of Business, New York University

Antonio Marra

Bocconi University - Department of Accounting

Ron Shalev

University of Toronto - Rotman School of Management

Date Written: March 30, 2015

Abstract

We analyze the choice allowed to parent firms under IFRS of how to account for a
business combination under common control (BCUCC), and provide evidence on the motivation
to select fair values and the economic implications of this choice. A BCUCC is a merger of two
firms owned by the same parent. Under IFRS, parent firms can use the acquisition method (fair
values) to record the BCUCC or use assets’ historical cost. We show that parents are likely to
choose fair values when they desire to increase the transparency of their financial reports and when
they likely need to raise capital. Using propensity-score matching, we find that firms that used fair
values are more likely to issue new public debt following the transaction. We also find that the
cost of issuing new debt for these firms is 55 basis points lower than that of comparable firms that
did not do BCUCCs. Our results suggest that using fair values in BCUCCs can increase
transparency and lower firms’ cost of debt.

Keywords: Business combination under common control; real effect of accounting choices; fair value accounting; balance sheet leverage.

JEL Classification: M41, G32, G34, G12

Suggested Citation

Bonacchi, Massimiliano and Marra, Antonio and Shalev, Ron, The Effect of Fair Value Accounting on Firm Public Debt – Evidence from Business Combinations under Common Control (March 30, 2015). European Accounting Review, 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

Stern School of Business, New York University ( 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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