Recognition Of Goodwill Research Articles

Do Firms Purchase the Pooling Method

We investigate how acquisition premiums and other factors influence firms' use of acquisition accounting methods (i.e., purchase versus pooling-of-interests) and whether firms, on average, are willing to incur higher acquisition premiums to use the pooling-of-interests method. We analyze a comprehensive sample of nontaxable corporate stock acquisitions occurring over the period 1990 through 1996. We use a two-stage, instrumental variables method to adjust for the potential endogenity between accounting method and acquisition premium and simultaneously to provide evidence whether acquisition premiums affect accounting method, vice versa, or both. After controlling for determinants of accounting method, regression evidence suggests that firms pay a premium to use the pooling method. Our analysis also indicates that financial reporting repercussions (e.g., the recognition of goodwill and the reporting of combined-firm profitability) motivate acquiring firms to structure transactions as pooling-of-interests.