We investigate firms' choices between the purchase and pooling methods in s
tock-for-stock acquisitions. We find that in acquisitions with large step-u
ps to targets' net assets, CEOs with earnings-based compensation are more l
ikely to choose pooling and avoid the earnings 'penalty' associated with pu
rchases. We find no association between stock-based compensation and the pu
rchase-pooling choice, suggesting that managers are not concerned about imp
lications of large step-ups for firms' equity values. We also find that the
likelihood of purchase increases with debt contracting costs, consistent w
ith its favorable balance sheet effects, and with costs of qualifying for p
ooling, particularly the restriction of share repurchases. (C) 2000 Elsevie
r Science B.V. All rights reserved. JEL classification: M41; G34.