Shareholder Wealth Effects of Pooling-of-Interests Accounting: Evidence from the Sec's Restriction on Share Repurchases Following Pooling Transactions

Abstract

Existing research on pooling-of-interests accounting suggests that managers are willing to pay additional transaction costs and merger premiums to use pooling to increase future accounting net income. There is currently little evidence indicating whether the firm's shareholders benefit from managers' decisions to use pooling. This paper examines whether shareholders benefit from the use of pooling-of-interests, by focusing on the transactions that arise from a recent SEC regulation restricting firms' ability to repurchase shares following pooling transactions. The results suggest that shareholders do not consider the favorable financial reporting effects of pooling to be beneficial, when they are obtained at the cost of firms' share repurchase programs. These results should be of interest to the FASB in their continued attempts to regulate the use of pooling.

Keywords: Pooling-of-interest, SEC, FASB, Regulation, Share repurchases, Mergers, Acquisitions, Tradeoff, Event study, Accounting

JEL Classification: G34, G35, G38, M41, M44