| The objective of the study was to develop and test a theory regarding management's choice of accounting treatment for business combinations. The research attempted to lend further support to the positive theory of accounting by identifying firm-specific characteristics associated with pooling of interest and purchase accounting.;Based on previous positive theory research a model was developed to explain the choice of accounting treatment for business combinations within a positive theory framework. The model was based on the following five factors: (1) owner vs. manager-control, (2) accounting-based compensation plans, (3) lending agreements, (4) political visibility, and (5) firm risk. These five factors were operationalized through the use of proxy variables and fifteen hypotheses were developed.;The research sample consisted of 182 firms that used either pooling of interests or purchase accounting during the years 1983-1985. Four statistical techniques were used to analyze the sample data: (1) the Mann-Whitney U-test, (2) probit analysis, (3) a test to control for industry, and (4) an exploratory analysis to measure any threshold effects.;The results indicated that for each of the five factors included in the model at least one operational variable was found to be significant in the hypothesized direction. Therefore, the study lends support to the positive theory of accounting. The research findings are important for standard setting bodies so that they may realize the potential costs and/or benefits that a particular change in APB No. 16 may cause. In addition, managers, lenders, and investors may more accurately assess the agency costs associated with each accounting treatment. Furthermore, the findings suggest that APB Opinion No. 16 may provide considerable management discretion regarding the choice of accounting treatment for business combinations and that these accounting methods may be vehicles for balance sheet and income statement manipulation. |
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