Real Effects of Bargain Purchase Gains under ASC 805: Evidence from Failed Banks

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Abstract

This study examines whether bargain-purchase gains (previously known as negative goodwill) reported under ASC 805 in FDIC-assisted transactions represent economic gains to the acquiring banks and thereby qualify as part of banks’ Tier 1 capital. For a sample of 135 publicly-held U.S. banks that acquired failed banks in the period January 2009-April 2012, I find that bargain-purchase gains are positively associated with acquirers’ future performance. Also, bargain-purchase gains appear to capture expected future gains including and beyond the FDIC subsidy. Specifically, the component of bargain-purchase gains that is orthogonal to the FDIC subsidy is positively associated with acquirers’ future short-run and long-run stock market performance and accounting performance. Overall, the results imply that fair value accounting as implemented under ASC 805 enables bargain-purchase gains to reliably reflect expected future gains, rather than measurement error or agency problem.

Author

• You-il (Chris) Park, Duke University