Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 96 requires that firms rescind stock repurchase plans to receive pooling treatment for a business acquisition. In this study, we document the additional opportunity cost to pooling imposed by SAB No. 96 and revisit the purchase vs. pooling question with the additional consideration. Specifically, we examine whether firms should rescind or forgo stock repurchase plans to qualify to pool or simply accept purchase accounting treatment for mergers. We begin by establishing why firms choose to pool. We find that, consistent with anecdotal evidence in the financial press, firms pool to avoid the decreased earnings caused by amortization of goodwill that is recorded in a purchase. Next, given this motivation for pooling, we examine the purchase vs. pooling decision with the additional consideration imposed by the prohibition of stock repurchases. Our results suggest that forgoing stock repurchases to pool may not be in the best interest of shareholders. These findings support the decision of the FASB to eliminate pooling as an alternative.

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