The Value Relevance of Earnings and Book Value Under Pooling and Purchase Accounting

✍ Scribed by C.S. Agnes Cheng; Kenneth R. Ferris; Su-Jane Hsieh; Yuli Su

• Publisher: Elsevier Science
• Year: 2005
• Tongue: English
• Weight: 260 KB
• Volume: 21
• Category: Article
• ISSN: 0882-6110
• DOI: 10.1016/s0882-6110(05)21002-7

✦ Synopsis

This study examines the value relevance of reported earnings and book value under pooling-of-interests and purchase accounting. Using a sample of 110 merger or acquisition transactions from the period 1988 to 1996, the value relevance of the two accounting approaches is investigated by examining the correlation of post-merger earnings and book value with share price. Regression analysis using Ohlson's (1995) valuation model is conducted for the merger year (m) and the subsequent year (m þ 1) using three samples (pooling only, purchase only and a combined sample). The results are as follows:

When pooling accounting is used, only earnings are value relevant, and the results are consistent with earnings under pooling being more value relevant than book value. When purchase accounting is used, both earnings and book value are value relevant and no significant difference was found between the value relevance of earnings and book value.