This paper attempts to tease out some of the reasons why the history of M&A accounting has been so fraught. It compares the different M&A accounting regimes which have been tried over time in UK, US ...and international standards. It illustrates the quantitative impact of alternative accounting regimes on financial statements. It asks whether the resulting numbers make any difference to decisions and behaviour. It charts the rising scale of M&A expenditures which have accompanied the different accounting regimes. And it suggests that a number of historical developments have intensified the challenges posed by accounting for M&A - developments in firms' investment choice between M&A or new tangibles, in the role of intangibles, in means of payment for M&A, in stock market price movements, in the synergies created by M&A, and in 'creative accounting'.
This paper is concerned with the allegation that fair value accounting rules have contributed significantly to the recent financial crisis. It focuses on one particular channel for that contribution: ...the impact of fair value on the actual or potential failure of banks. The paper compares four criteria for failure: one economic, two legal and one regulatory. It is clear from this comparison that balance sheet valuations of assets are, in two cases, crucial in these definitions, and so the choice between ‘fair value’ or other valuations can be decisive in whether a bank fails; but in two cases fair value is irrelevant. Bank failures might arise despite capital adequacy and balance sheet solvency due to sudden shocks to liquidity positions. Two of the most prominent bank failures cannot, at first sight, be attributed to fair value accounting: we show that Northern Rock was balance sheet solvent, even on a fair value basis, as was Lehman Brothers. The case study evidence is augmented by econometric tests that suggest that mark‐to‐market accounting has had only a very limited influence on the perceived failure risk of banks.
The accounting literature has found evidence that acquirers in stock-for-stock M&A have typically managed earnings upwards ahead of a bid. Other literatures have concluded that, when stock prices are ...high and rising, M&A is higher, more M&A is financed with stock, market sentiment and stockholders’ perceptions of information appear to change, and in these circumstances new (arbitrage) motivations for M&A emerge. This paper revisits earnings management ahead of M&A in the light of these findings, comparing experience in ‘hot’ and ‘cold’ markets. It finds that such earnings management is more pronounced in hot markets; that only in such markets are positive discretionary accruals commonly associated with positive abnormal returns on the announcement of earnings; and that in such markets – against the expectations from signalling theory – these positive returns are not reversed on announcement of a stock-for-stock bid. The results suggest that the economic benefits achieved by engaging in earnings management during hot markets are indeed significant: in hot markets, we estimate that on average share acquirers engage in working capital accrual management equivalent to over a third of the average acquirer’s return on total assets in that year; and that this earnings management is associated with increases in market value which are statistically and economically significant, enabling the bidder to secure control of the target with fewer shares.
This study finds that pro-forma earnings forecasts by bidding firms during acquisitions are associated with a higher likelihood of deal completion, expedited deal closing, and with a lower ...acquisition premium − but only in stock-financed acquisitions. Analysts also respond to these forecasts by revising their forecasts for the bidder upward. However, the benefits of forecast disclosure only accrue to bidders with a strong forecasting reputation prior to the acquisition. Explaining why not all bidders forecast, we document a higher likelihood of post-merger litigation and CEO turnover for bidders with a weak forecasting reputation and for those that underperform post-merger.
•Bidder pro-forma forecasts are associated with higher likelihood of deal completion.•Forecasts lead to lower takeover premia and analyst consensus upgrades.•Forecasts play a more important role in stock-financed acquisitions.•The benefits of forecasting only accrue to bidders with a strong forecasting reputation.•Forecasting costs include a higher litigation likelihood and management turnover.
The paper draws on the economics of standards to inform current debates on international accounting standards. It traces the benefits claimed for standards - their contribution to the division of ...labour, innovation, trust, etc.; and the costs, including entry barriers and compliance costs. It illustrates these benefits and costs with cases from accounting regulation. It adopts two approaches to the question whether accounting regulation is best achieved by a single set of standards for the world, or by competing systems. The first approach focuses on contributions in economics, including the theory of standards races and of optimal variety. In these analyses, only in special circumstances has a single standard emerged as the superior outcome. The second approach introduces evidence from accounting and finance on the problems of translation with globalised financial markets, and on the relative costs and benefits of multiple standard-setters or a single global scheme. The most compelling net benefits of harmonisation arise for small economies moving from idiosyncratic to international standards.
Statistical studies over the last forty-five years show that, although there are success stories, very many mergers and acquisitions do not result in the increased operating profits that economics ...textbooks would lead one to expect. As consultancy McKinsey have put it, ‘Anyone who has researched merger success rates knows that roughly 70% fail’. Yet—mysteriously—M&A activity has boomed across the globe, with a forty-fold increase in deals done each year now compared with four decades ago, in spite of the adverse general evidence. How can it be that talented, energetic, highly skilled, law-abiding, income-maximising participants in the M&A market will often promote mergers that lead to no operating gains, frequently with adverse effects on the wider economy too? Drawing on findings from a wealth of statistical analyses and case evidence from many businesses, the book presents answers to this merger mystery. In a synthesis of ideas from several disciplines, solutions are detected in misaligned incentives, distorted financial engineering and information asymmetry. By revealing how weaknesses at multiple points can interact and cumulate to produce inefficient outcomes, the discussion serves as a corrective to the overwhelmingly positive tone of most commentary on M&A, whilst also advocating changes in participants’ contracts, in taxation, and in regulation which could significantly reduce the number of mergers that fail. Designed to be accessible to a wide readership, the book will be of interest to investors, to M&A practitioners and commentators, to researchers and students of economics, political economy, finance, management and accounting, and—importantly—to policy makers working in these areas.
Warren Buffett famously commented that the U.S. airline industry had made zero profit in its first nine decades. Subsequently, between the millennium and the Great Financial Crisis the airlines in ...total lost almost $60 billion. Yet no major airline was liquidated or taken over in those nine years. Financial support was repeatedly provided by GE, the conglomerate supplier of leasing finance, engines, and servicing. The article offers a historical perspective on the factors behind this relationship between GE and airlines. It outlines the benefits or costs to GE, airline shareholders, and passengers; the relevance of the model for other industries; and implications for different notions of efficiency.
: Earnings management by acquirers ahead of share for share bids may affect whether a bid succeeds, and hence which management team controls the target's assets, as well as the distribution of gains ...between target and acquirer shareholders. This paper tests for such earnings management for the UK, the world's second largest takeover market, in the period 1997–2001 when M&A reached record levels and share for share deals came to account for the majority of expenditure. Using a range of approaches originating in Jones' model, the paper finds evidence consistent with earnings management ahead of share‐financed bids.
This paper explores the dramatic fall in receipts of UK corporation tax (UKCT) from banks, and the widening gap between the global corporation tax recorded as payable in banks' financial statements ...and the UKCT receipts recorded by the tax authorities. It reviews possible explanations, including changes in tax rates, in operating profits, in deductions which reduce taxable profits, and in the share of profit originating in, or recorded in, overseas jurisdictions. It assigns significant roles to tax-deductible asset impairments and to the allocation of profits among different jurisdictions. It suggests reasons why the recovery in banks' global operating profits may not be accompanied by an early sharp recovery in UKCT receipts.
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