The effects for accounting regulation for business combinations on firm behaviours and stock pricing : a theory and tests

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This research empirically examines (1)how investors are forming the expectation based on accounting information, and (2)how a firm selects the accounting and recognition timing. I discuss the regulation setting of business combinations. First, I confirm a supplementary role of the statement and balance sheet information. I find that the earnings-book value (with tome trend) model better explained the level and change of stock prices in 531 firms which had been listed in the TSE (Tokyo Stock Exchange) for the period of 1967-2001. Second, the panel analysis of TSE firms in 1964-2001, shows that (1)the growth firms prefer conservative accounting measurement to income recognition delay, (2)firms facing more severe conflicts over devidend policy tend to select more conservative accounting, (3)a manager tends underestimate earnings rather than net assets. My collective evidence provides a regulatory explanation for business combinations. A merger on an equal basis has the severe conflicts among stakeholders because the management control has not established. In such case, rational stakeholders would prefer conservative accounting that could not overestimate assets, for example, the pooling method. The use of pooling method must certain conditions that limit earnings management.