Articlegreen2000

Purchase, Pooling, and Equity Analysts' Valuation Judgments

Patrick E. Hopkins · Richard W. Houston · Michael F. Peters

139 citations0/0 files storedThe Accounting Review

No readable copy stored yet — this record is metadata only.

No open-access location is known for this record yet.

Literature note Cite in a project Citation map

Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Financial Reporting and Valuation Research

Abstract

We investigate whether analysts' common-stock valuation judgments are predictably affected by (1) different methods of accounting for business combinations and (2) the number of years that elapse after the business combinations occur. Numerous articles in the business press suggest that companies go to great lengths to avoid amortization of the purchase-method acquisition premium, either by structuring acquisitions to qualify for pooling treatment or aggressively allocating the acquisition premium to "in-process" research and development (IPRD) and immediately expensing it. Firms' reluctance to capitalize and amortize the acquisition premium often is based on their managers' belief that amortizing the acquisition premium impairs firm value, especially in years subsequent to the transaction. However, research to date neither refutes nor defends this belief. We report the results of an experiment in which 113 buy-side equity analysts participated. Consistent with our expectations, analysts' post-combination valuation judgments are lower when a parent company records and amortizes an acquisition premium in a purchase-method business combination and equivalently higher when the company either immediately expenses the entire purchase-method acquisition premium as IPRD or records the business combination using the pooling-of-interests method. In addition, in the case where the parent company records and amortizes an acquisition premium in a purchase-method business combination, analysts' stock-price judgments are significantly lower if the business combination occurred three years ago as compared to one year ago. We also test the FASB's proposal to report separate sub-totals (and related EPS figures) for pre-goodwill-amortization operating income, after-tax goodwill amortization, and net income. Our results suggest that the Board's proposed goodwill-reporting format mitigates the valuation difference between combinations that occurred one-year ago versus three-years ago. We discuss the implications of this study for users of financial accounting information and for accounting standard setters.

Paper brief

Loading…

Cite this work

Citation unavailable for this work.

BibTeX RIS CSL-JSON

No public copy is stored for this record, so only the metadata is cited.

Citations in this library

Citation map →

Stored only when both papers are in the corpus — 139 citations exist upstream.

References

1993The Adaptive Decision Maker 1994The Adaptive Decision Maker 2008Financial Accounting Standards Board (FASB)1998Comprehensive Income Reporting and Analysts' Valuation Judgments 1993Determinants of judgment performance in accounting settings: Ability, knowledge, motivation, and environment 1996Causes and Effects of Discretionary Asset Write-Offs 1993The analysis and use of financial statements 1996Repeated Accounting Write-Offs and the Information Content of Earnings

Cited by

2007A Content Analysis of the Comprehensive Income Exposure Draft Comment Letters 2002Using Laboratory Experiments to Evaluate Accounting Policy Issues 2001Goodwill Amortization and the Usefulness of Earnings 2001Why Does Fixation Persist? Experimental Evidence on the Judgment Performance Effects of Expensing Intangibles 2014Earnings presentation effects on manager reporting choices and investor decisions 2009The Impact of Academic Accounting Research on Professional Practice: An Analysis by the AAA Research Impact Task Force

Explore the map →

Papers that cite the same references — the relational fallback while embeddings are still backfilling.

Imported from OpenAlex (CC0) — nothing here is generated.