The Effect of Fair Value Accounting on Firm Public Debt – Evidence from Business Combinations Under Common Control

Massimiliano Bonacchi, Antonio Marra and Ron Shalev

European Accounting Review, 2025, vol. 34, issue 3, 999-1027

Abstract: We analyze the choice allowed to parent firms under IFRS of how to account for a business combination under common control (BCUCC), and provide evidence on the motivation to select fair values and the economic implications of this choice. A BCUCC is a merger of two firms owned by the same parent. Under IFRS, parent firms can use the acquisition method (fair values) to record the BCUCC or use assets’ historical cost. We show that parents are likely to choose fair values when they desire to increase the transparency of their financial reports and when they likely need to raise capital. Using propensity-score matching, we find that firms that used fair values are more likely to issue new public debt following the transaction. We also find that the cost of issuing new debt for these firms is 55 basis points lower than that of comparable firms that did not do BCUCCs. Our results suggest that using fair values in BCUCCs can increase transparency and lower firms’ cost of debt.

Date: 2025
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DOI: 10.1080/09638180.2024.2315142

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