The Effect of SFAS 141 and 142 on the Market for Corporate Control Ashiq Ali and Todd Kravet Navin Jindal School of Management, University of Texas at Dallas ashiq.ali@utdallas.edu kravet@utdallas.edu September 27, 2012 Abstract We investigate the effects of accounting rule changes that eliminate the pooling method (SFAS 141) and goodwill amortization (SFAS 142) on the form of acquisition financing and on a firm’s takeover probability. The primary requirement to qualify for the pooling method is structuring the transaction as a stock-for-stock exchange. We find that before the new accounting rules, target firms’ step-up value is positively associated with the probability of using stock-for-stock as against partial stock financing. After the new rules, this association decreases significantly and is indistinguishable from zero. These results suggest that in the pre SFAS 141 period, greater use of stock-for-stock exchanges for target firms with larger step-up values was motivated by the favorable effect of the pooling method on the reported income of the acquirer, and this motivation to use stock-for-stock exchanges goes away with the elimination of the pooling method. The new rules also resulted in a greater decrease in takeover probability for firms with larger step-up values than for firms with smaller step-up values, presumably due to the elimination of the pooling method. When the step-up value of a firm is composed primarily of goodwill, the above effect is attenuated, consistent with the elimination of goodwill amortization. Overall, the study uses a natural experiment to provide a novel finding that accounting methods have significant effects on the form of acquisition financing and on takeover probability. We appreciate the helpful comments of Jarrad Harford, Bob Holthausen, and workshop participants at Hong Kong University of Science and Technology, London Business School, London School of Economics, State University of New York at Buffalo, and the University of Houston.