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Governance and Merger Accounting: Evidence from Stock Price Reactions to Purchase versus Pooling

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  • F. Asis Martinez-Jerez
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    Abstract

    This paper examines the effect of corporate governance on investor reactions to accounting choice in the context of accounting for business combinations. Using a sample of 324 recent stock swap acquisitions I find that, contrary to practitioners' belief that capital markets penalize purchase accounting, the opposite appears to be true; there is a negative and significant differential market reaction of approximately 4% for acquiring firms that announce pooling transactions. This return differential declines to negative 8% for firms with ineffective corporate governance. These findings are consistent with capital markets interpreting the choice of purchase accounting as a signal of management's confidence in the likelihood of a successful merger. This signal is particularly relevant when corporate governance is considered ineffective.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/09638180701706013
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal European Accounting Review.

    Volume (Year): 17 (2008)
    Issue (Month): 1 ()
    Pages: 5-35

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    Handle: RePEc:taf:euract:v:17:y:2008:i:1:p:5-35

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