Accounting for business combinations and takeover premiums: Pre- and post-IFRS

Abstract

The adoption of International Financial Reporting Standards (IFRS) in Australia in 2005 resulted in goodwill accounting shifting from systematic annual amortisation to impairment testing. We examine whether IFRS adoption changed the association between takeover premiums and the difference between a target firm’s pre-acquisition market and book values (pre-acquisition step-up). Our results show a negative association between takeover premiums and the pre-acquisition step-up of the target firm. This association reduces however, after Australia adopted IFRS and no longer required goodwill amortisation. Consistent with the incentives arising from contracts written around accounting numbers, our results are strongest for bidding firms which compensate their CEO using an accounting-based bonus plan. These results are robust to a battery of sensitivity tests.