Shareholder Wealth Effects of Pooling-of-Interests Accounting : Evidence from the Sec's Restriction on Share Repurchases Following Pooling Transactions

This paper examines the shareholders' perceptions of the costs and benefits associated with the use of pooling-of-interests by investigating the market's reaction to the SEC's adoption of SAB 96. This regulation forced firms to choose between using pooling-of-interests and maintaining their share repurchase programs. The results of an event study of the market's reaction to that regulation suggest that the restriction was costly. The regulation proved more costly for the firms that had to forgo the benefits of expected share repurchases to use pooling, and less costly to the firms that achieved larger financial reporting effects from the use of pooling. This result suggests that shareholders benefit from a restriction on the use of pooling. An analysis of the returns subsequent to the adoption of SAB 96 indicates that any benefits shareholders obtained from the regulation on pooling dissipated as the market learned that managers elected to retain pooling. Overall, the results suggest that shareholders incur a net cost when managers choose to use pooling-of-interests, and these findings should be of particular interest to regulators, practitioners and researchers