Fair value accounting, earnings management, and the case of bargain purchase gain

Steven Lilien, Bharat Sarath and Yan Yan

Asian Review of Accounting, 2019, vol. 28, issue 2, 229-253

Abstract: Purpose - The purpose of this paper is to investigate the association between bargain purchase gains (BPGs) booked by the acquirer and smoothing of acquirers’ earning performance across time. Design/methodology/approach - The authors use a sample of 122 bargain purchase acquisitions in non-financial industries from 2009 to 2012 and a pair-match control group of 122 goodwill acquisitions. Findings - The authors find that BPGs, and in particular, the Level-3 fair value estimates of intangible assets acquired, have consistently been used to smooth earnings but that such smoothing activities are not associated with long-term market returns. Originality/value - This study is the first one to investigate bargain purchase acquisitions in a broad range of non-financial industries and suggests that managers are using the valuation of intangibles to avoid unfavorable earnings even though these valuations are not credible to investors.

Keywords: Earnings management; ASC 805; ASC 820; Bargain purchase gain; Fair value measurement (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eme:arapps:ara-04-2018-0091

DOI: 10.1108/ARA-04-2018-0091

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