The value relevance of classifying mergers

This paper studies and evaluates the effect of the existing accounting classification system (pooling versus purchase) on the risk adjusted excess returns. A return explanation study is used to investigate the effects of the current accounting classification on the acquirer's performance while controlling for other variables that have been found significant by scholars in the field of Accounting and Finance. The objective of this study is twofold: (1) To answer the question whether the current accounting classification helps explaining excess returns. That is, is the fitting model for the excess returns different for both types of companies (companies that used the pooling method versus companies that used the purchase method)? (2) To assess the direction of the excess returns, positive or negative, when the company reports the merger as pooling of interests compared with reporting as purchase.;The paper provides evidence that firms that used the pooling of interests method behave economically differently compared with firms that used the purchase method. Furthermore, the current accounting method for business combinations has explanatory power on the excess returns over other variables that were found relevant by other accounting researchers. Canceling one of the accounting methods, and restricting the companies to use only one method, may cause some valuable information to be lost. The results also show that there is positive excess returns to firms that used the pooling of interests method compared with firms that used the purchase method.