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Predecessor versus Acquisition: Evidence of Business Combination under Common Control from China

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  • Shimin Chen
  • Weifang Han
  • Qifeng Zhang

Abstract

We investigate the value relevance of two different accounting methods, predecessor vs. acquisition, for business combination under common control (BCUCC) in China. Based on the return and price models, we find that net income under the predecessor method is of higher value relevance than that under the acquisition method. Further analysis suggests that the difference appears to be driven by uncertainties in fair value estimation surrounding the BCUCC and that net incomes under predecessor method can better predict future earnings and future operating cash flows than under the acquisition method. Our research provides some initial evidence to support the use of the predecessor method in China, and at the same time, we discuss implications for the IASB standard setting project for the BCUCC.

Suggested Citation

  • Shimin Chen & Weifang Han & Qifeng Zhang, 2021. "Predecessor versus Acquisition: Evidence of Business Combination under Common Control from China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(8), pages 2356-2369, June.
    • Handle: RePEc:mes:emfitr:v:57:y:2021:i:8:p:2356-2369
    DOI: 10.1080/1540496X.2020.1829407
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