Acquisition accounting method choice and regulatory capital in the banking industry: Are they related

I investigate whether banks utilize acquisition accounting method choice for regulatory capital management. I concentrate on a time-period (1996–2001) that prior research has not examined, and one in which the banking industry experienced substantial acquisition activity. I find that for lesser-capitalized banks, the tier 1 risk-based capital ratio is negatively related to the likelihood of a pooling-of-interests transaction: the higher a bank's pre-acquisition capital ratios, the less likely that the acquisition will be structured as a pooling. I find that an acquiring bank's preacquisition earnings is negatively related to the likelihood of pooling. Contrary to the results of prior studies, the step up to net assets of the target firm by itself does not have a significant impact on the likelihood of a bank pooling, when bank managers have other variables to consider, such as their earnings and incentive compensation. For banks that report higher capital ratios, my results suggest that their CEOs are more likely to perceive the share repurchase restriction under the pooling method to be significantly restrictive that they are less willing to use pooling. Overall, my results are consistent with banks exhibiting a greater concern for an acquisition's effect on regulatory capital ratios than on the size of the step-up to net assets, if the bank reports a lower pre-acquisition capital ratio. In robustness checks, I do not find evidence that non-bank firms are concerned about the effect of their choice of acquisition accounting method on leverage ratios.