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Economic Quarterly

Winter 1999

Pooling or Purchase: A Merger Mystery

John R. Walter

Public merger announcements often state which type of merger accounting, pooling or purchase, has been employed. The choice can strongly influence accounting results. For example, reported earnings are often higher under pooling than purchase accounting. Yet empirical analysis indicates that the higher earnings reports do not fool investors. Why then do acquisitive managers display a preference for pooling, especially considering its high cost? Here is a mystery to be solved. U.S. accounting standards may soon be changed to eliminate pooling as an option. Still, any change should be approached cautiously since there is reason to suspect that real managerial benefits underlie the pooling preference.

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