The Implications of Unverifiable Fair-Value Accounting: Evidence from the Political Economy of Goodwill Accounting

59 Pages Posted: 13 Mar 2006  

Karthik Ramanna

Harvard University - Harvard Business School; University of Oxford - Blavatnik School of Government

Multiple version iconThere are 2 versions of this paper

Date Written: August 13, 2007

Abstract

I study the evolution of Statement of Financial Accounting Standard (SFAS) # 142, which uses unverifiable fair-value estimates to account for acquired goodwill. I find evidence consistent with the Financial Accounting Standards Board (FASB) issuing SFAS 142 in response to political pressure over its proposal to abolish pooling accounting: pro-pooling firms can be linked — via political contributions — to U.S. Congresspersons pressuring the FASB on this issue. This result is interesting given the proposal to abolish pooling was due in part to the Securities and Exchange Commission's concerns over pooling misuse. I also find evidence consistent with lobbying support for SFAS 142 increasing in firms' discretion under the standard. Agency theory predicts this unverifiable discretion will be used opportunistically. The results highlight the potential costs of unverifiable fair-value accounting.

Keywords: Accounting, fair values, politics, standard setting

JEL Classification: D72, M41, M43, M44, M49

Suggested Citation

Ramanna, Karthik, The Implications of Unverifiable Fair-Value Accounting: Evidence from the Political Economy of Goodwill Accounting (August 13, 2007). MIT Sloan School of Management Research Paper. Available at SSRN: https://ssrn.com/abstract=917871 or http://dx.doi.org/10.2139/ssrn.917871

Karthik Ramanna (Contact Author)

Harvard University - Harvard Business School ( email )

Boston, MA 02163
United States

University of Oxford - Blavatnik School of Government ( email )

10 Merton St
Oxford, Oxfordshire OX1 4JJ
United Kingdom

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