Intended or Unintended Consequences of Business Acquisitions: The Case of Financial Services Institutions

64 Pages Posted: 20 Jun 2017

See all articles by Steven B. Lilien

Steven B. Lilien

City University of New York - Stan Ross Department of Accountancy

Bharat Sarath

Rutgers, The State University of New Jersey - Accounting

Yan Yan

Fairleigh Dickinson University

Date Written: June 19, 2017

Abstract

ASC 805 gives the management of an acquiring firm flexibility in valuation and the possibility of recognizing day one bargain purchase gains (BPG). BPG acquisitions occurred frequently in the financial services industry during the crisis of 2008 and some of these acquisitions were assisted by the FDIC which provided partially indemnification against future losses. The combination of these two events set up a unique situation to study fair value accounting. By using the data from all bank transactions, we are able to highlight the fundamental tension between relevance and reliability in fair value accounting. Our results show that in FDIC assisted transactions, fair values reflected the underlying economic transactions more accurately whereas non-FDIC assisted BPG transactions suggest that management was able to use inflated fair values to present an overoptimistic picture of the acquisition.

Keywords: Financial Institution, Bargain Purchase Gain, ASC 805, Fair Value Measurement, ASC 820, Earnings Management

JEL Classification: G20, G28, G34, M41

Suggested Citation

Lilien, Steven B. and Sarath, Bharat Sarrukai and Yan, Yan, Intended or Unintended Consequences of Business Acquisitions: The Case of Financial Services Institutions (June 19, 2017). Available at SSRN: https://ssrn.com/abstract=2989214 or http://dx.doi.org/10.2139/ssrn.2989214

Steven B. Lilien

City University of New York - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3163 (Phone)
646-312-3161 (Fax)

Bharat Sarrukai Sarath

Rutgers, The State University of New Jersey - Accounting ( email )

94 Rockafeller Road
Piscataway, NJ 08854
United States

Yan Yan (Contact Author)

Fairleigh Dickinson University ( email )

1000 River Rd
Teaneck, NJ 07666
United States

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