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


  • F. Asis Martinez-Jerez


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.

Suggested Citation

  • F. Asis Martinez-Jerez, 2008. "Governance and Merger Accounting: Evidence from Stock Price Reactions to Purchase versus Pooling," European Accounting Review, Taylor & Francis Journals, vol. 17(1), pages 5-35.
  • Handle: RePEc:taf:euract:v:17:y:2008:i:1:p:5-35
    DOI: 10.1080/09638180701706013

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