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Market valuations of bargain purchase gains: are these true gains under IFRS?

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  • Marwa Elnahass
  • Leonidas Doukakis

Abstract

This study investigates stock market valuations for bargain purchase gains (BPGs) in the context of International Financial Reporting Standards (IFRS) between 2005 and 2014. Motivated by the increased frequency and high concentration of BPGs in Europe, we study a sample of acquirers listed on the London Stock Exchange to assess the value relevance of BPGs (a) under discrepant disclosure practices (i.e. disclosure versus non- disclosure of the reasons for the gains), (b) before and after the revision of IFRS 3, and (c) considering different income classifications for BPGs (operating or non-operating earnings). BPGs, on average, are not significantly valued by the stock market. However, the post-IFRS 3 revision period, marked by stricter measurement criteria and additional disclosure requirements, witnessed a significant shift in firm valuations. BPGs for which the reason for the gain is disclosed are positively valued only in the post-IFRS 3 revision period. BPGs are consistently perceived as value irrelevant for those firms which fail to comply with mandated IFRS 3 disclosure requirements regarding the reason for the gain. Finally, BPGs classified as a component of non-operating income with sufficient note disclosure on the reason for the gain are significantly associated with prices and returns.

Suggested Citation

  • Marwa Elnahass & Leonidas Doukakis, 2019. "Market valuations of bargain purchase gains: are these true gains under IFRS?," Accounting and Business Research, Taylor & Francis Journals, vol. 49(7), pages 753-784, November.
    • Handle: RePEc:taf:acctbr:v:49:y:2019:i:7:p:753-784
    DOI: 10.1080/00014788.2019.1609345
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    Cited by:

    1. Ali Uyar & Simone Pizzi & Fabio Caputo & Cemil Kuzey & Abdullah S. Karaman, 2022. "Do shareholders reward or punish risky firms due to CSR reporting and assurance?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(5), pages 1596-1620, July.
    2. Mamun, Abdullah & Tannous, George & Zhang, Sicong, 2021. "Do regulatory bank mergers improve operating performance?," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 152-174.

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