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

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.

Citation

Lilien, S., Sarath, B. and Yan, Y. (2020), "Fair value accounting, earnings management, and the case of bargain purchase gain", Asian Review of Accounting, Vol. 28 No. 2, pp. 229-253. https://doi.org/10.1108/ARA-04-2018-0091