Merger and Acquisition Accounting in the UK and Their Effects on Stock Prices
Merger and Acquisition accounting in the UK and their effects to stock prices
by
Yan Shao
2006
A Dissertation presented in part consideration for the degree of MA in Finance and Investment
Abstract
There has been considerable controversy surrounding the accounting practices for mergers and acquisitions. The focus of this controversy has been on the differences in financial statements that arise under the two accounting methods: merger (pooling-ofinterests) (Add together the book values of the assets and liabilities of the two companies) and acquisition (purchase) accounting (Add the fair values of the target’s assets and liabilities at the date of acquisition to the book values of purchase’s assets and liabilities). They are simply in no way to alter the underlying nature of the business combination. However, the two methods do result in substantial differences in the way the financial statements appear subsequent to the combination. The main objective of the dissertation is to investigate whether they have a different effect on the stock prices of acquiring firms during the combination period, and whether their abnormal returns (firms with different accounting treatments) during the combination period are different or not.
The methodology that has been used in this analysis is event study, the sample firms
(listed in London stock exchange) are chosen from the M&A cases in the UK dated from 2000 to 2006. They have been divided into two groups – purchase and pooling group. Their effects to the stock prices are examined by the Market model developed by Fama (1969) that assumed a linear relationship between the return of any security to return of the market portfolio, and the independent T-test that uses to assess the statistical significance of means between the two groups and two sub-groups.
The research result is partly consistent with earlier studies of the different accounting method effect, which indicates that whether
by
Yan Shao
2006
A Dissertation presented in part consideration for the degree of MA in Finance and Investment
Abstract
There has been considerable controversy surrounding the accounting practices for mergers and acquisitions. The focus of this controversy has been on the differences in financial statements that arise under the two accounting methods: merger (pooling-ofinterests) (Add together the book values of the assets and liabilities of the two companies) and acquisition (purchase) accounting (Add the fair values of the target’s assets and liabilities at the date of acquisition to the book values of purchase’s assets and liabilities). They are simply in no way to alter the underlying nature of the business combination. However, the two methods do result in substantial differences in the way the financial statements appear subsequent to the combination. The main objective of the dissertation is to investigate whether they have a different effect on the stock prices of acquiring firms during the combination period, and whether their abnormal returns (firms with different accounting treatments) during the combination period are different or not.
The methodology that has been used in this analysis is event study, the sample firms
(listed in London stock exchange) are chosen from the M&A cases in the UK dated from 2000 to 2006. They have been divided into two groups – purchase and pooling group. Their effects to the stock prices are examined by the Market model developed by Fama (1969) that assumed a linear relationship between the return of any security to return of the market portfolio, and the independent T-test that uses to assess the statistical significance of means between the two groups and two sub-groups.
The research result is partly consistent with earlier studies of the different accounting method effect, which indicates that whether
References: Sudarsanam, S., Holl, P. & Salami, A. (1996) “Shareholder wealth gains in mergers effect of synergy and ownership structure”, Journal of Business Finance & Thomson Financial (2005) “Mergers & Acquisitions Review” Thomson Financial (2006) “Mergers & Acquisitions Review” Vincent, L. (1997) “Equity Valuation Implications of Purchase versus Pooling Accounting”, The Journal of Financial Statement Analysis, 2(Summer), pp Wallman, S. M. H., Wallman, K. M. H. & Aronow, G. F. (1999) “Pooling-of-Interests Accounting and High Growth Economy Companies: A Paper Examining the Wang, Z. (1993) “An Empirical Evaluation of Goodwill Accounting”, Journal of Applied Business Research, 9(Autumn), pp