Mergers, accountants, and economic efficiency

Journal title ECONOMIA E POLITICA INDUSTRIALE
Author/s Geoff Meeks, J. Gay Meeks
Publishing Year 2014 Issue 2014/1
Language Italian Pages 16 P. 121-136 File size 59 KB
DOI 10.3280/POLI2014-001007
DOI is like a bar code for intellectual property: to have more infomation click here

Below, you can see the article first page

If you want to buy this article in PDF format, you can do it, following the instructions to buy download credits

Article preview

FrancoAngeli is member of Publishers International Linking Association, Inc (PILA), a not-for-profit association which run the CrossRef service enabling links to and from online scholarly content.

This paper explores some consequences for economic efficiency of creative accounting practices by merging companies. It assumes semi-strong information efficiency in the markets for capital and for corporate control; and/or the use of executive contracts relating pay to accounting profit. Ahead of takeover, prospective acquirers can flatter their earnings record in order to secure the support of investors for stock-for-stock deals. During takeover, accounting devices have been used to fill "cookie jars" ready to inflate earnings in the years after merger. After takeover, newly appointed managers can take a "big bath", at the expense of their predecessors’ record, enhancing their own apparent performance. The consequences for economic efficiency can include: allocating control of a business to an inferior management team; cheating stockholders by distorting market prices; undermining markets as «dishonest dealings drive honest dealings out of the market » (Akerlof, 1970); creating incentives to undertake mergers which will not boost underlying profitability; and inhibiting the monitoring and control of agents by principals. The paper helps to explain the finding that the typical merger does not enhance operating performance, as shown for example in Ravenscraft and Scherer’s classic study.

Keywords: Mergers, earnings management, creative accounting, agency

Jel codes: L25

  1. Akerlof G. 1970. The market for ‘lemons’: quality uncertainty and the market mechanism. Quarterly Journal of Economics, 84 (3): 488-500, DOI: 10.2307/1879431
  2. Agrawal A., Jaffe J., Mandelker G. 1992. The post-merger performance of acquiring firms: a re-examination of an anomaly. Journal of Finance, 47 (2): 1605-1621, DOI: 10.1111/j.1540-6261.1992.tb04674.x
  3. Amel-Zadeh A., Lev B., Meeks G. 2013. The benefits and costs of managerial earnings forecasts in mergers and acquisitions. SSRN Working Papers 2198958.
  4. Ayers B., Jiang J., Yeung E. 2006. Discretionary accruals and earnings management: an analysis of pseudo earnings targets. The Accounting Review, 81 (3): 617-652, DOI: 10.2308/accr.2006.81.3.617
  5. Ayres C. 2002. $845m bonanza for Enron team. The Times, June 18.
  6. Beaver W. 1998. Financial Reporting: An Accounting Revolution. Prentice Hall: Englewood Cliffs.
  7. Botsari A., Meeks G. 2008. Do acquirers manage earnings ahead of a takeover bid?. Journal of Business Finance and Accounting, 35 (5-6): 633-670, DOI: 10.1111/j.1468-5957.2008.02091.x
  8. Cheng Q., Warfield T. 2005. Equity incentives and earnings management. The Accounting Review, 80 (2): 441-476, DOI: 10.2308/accr.2005.80.2.441
  9. Connon H. 1993. Sweet deals may turn sour. The Independent, April 1.
  10. Erikson M., Wang S. 1999. Earnings management by acquiring firms in stock for stock mergers. Journal of Accounting and Economics, 27 (2): 149-176, DOI: 10.1016/S0165-4101(99)00008-7
  11. Fama E. 1970. Efficient capital markets: a review of theory and empirical work. Journal of Finance, 25 (2): 383-417, DOI: 10.1111/j.1540-6261.1970.tb00518.x
  12. Healy P. 1985. The impact of bonus schemes on the selection of accounting variables. Journal of Accounting and Economics, 7 (1-3): 85-107, DOI: 10.1016/0165-4101(85)90029-1
  13. IASB (International Accounting Standards Board). 2005. Impairment of Assets. International Accounting Standard 36. IASB: London.
  14. Injejiklan R. 1999. Performance evaluation and compensation research. Accounting Horizons, 13: 147-157, DOI: 10.2308/acch.1999.13.2.147
  15. Jensen M., Murphy K. 1990. Performance pay and top management incentives. Journal of Political Economy, 98: 226-264, DOI: 10.1086/261677
  16. Jones M. (ed.) 2011. Creative Accounting, Fraud and International Accounting Scandals. Wiley: Chichester.
  17. Keynes J.M. 1936. The General Theory of Employment Interest and Money. Macmillan: London.
  18. Kim Y., Park M. 2005. Journal of Financial and Quantitative Analysis. 40 (2): 435-463, DOI: 10.1017/S0022109000002374
  19. Lys T., Vincent L. 1995. An analysis of value destruction in AT&T’s acquisition of NCR. Journal of Financial Economics, 39 (2): 353-378, DOI: 10.1016/0304-405X(95)00831-X
  20. Meeks G. 1977. Disappointing Marriage: A Study of the Gains from Merger. Cambridge University Press: Cambridge (UK).
  21. Meeks G., Whittington G. 1975. Directors’ pay, growth and profitability. Journal of Industrial Economics, 24 (1): 1-14, DOI: 10.2307/2098094
  22. Meeks G., Meeks J.G. 1981. Profitability measures as indicators of post-merger efficiency. Journal of Industrial Economics, 29 (4): 335-344, DOI: 10.2307/2098249
  23. Moehrle S. 2002. Do firms use restructuring charge reversals to meet earnings targets?. The Accounting Review, 77 (2): 397-413, DOI: 10.2308/accr.2002.77.2.397
  24. Mulford C., Comiskey E. 2005. The Financial Numbers Game. Wiley: Chichester.
  25. Mulford C., Comiskey E. 2011. Creative accounting and accounting scandals in the USA, in Jones M. (ed.) Creative Accounting, Fraud and International Accounting Scandals. Wiley: Chichester.
  26. Olympus Corporation. 2011. The Third Party Committee, Investigation Report, published online.
  27. Paterson R. 1988. Fair value accounting following an acquisition, in Tonkin D., Skerratt L. (eds.) Financial Reporting, 1990-91: A survey of UK Reporting Practice. ICAEW: London.
  28. Perry S., Williams T. 1994. Earnings management preceding management buyout. Journal of Accounting and Economics, 18 (2): 157-179, DOI: 10.1016/0165-4101(94)00362-9
  29. Rangan S. 1998. Earnings management and the performance of seasoned equity offerings. Journal of Financial Economics, 50 (1): 101-122, DOI: 10.1016/S0304-405X(98)00033-6
  30. Ravenscraft D.J., Scherer F.M. 1987. Mergers, Sell-Offs and Economic Efficiency. Brookings: Washington.
  31. Roosenboom P., Goot T., Mertens G. 2003. Earnings management and initial public offerings: evidence from the Netherlands. Journal of Accounting and Economics, 38 (3): 243-266.
  32. Saleh N., Ahmed K. 2005. Earnings management of distressed firms during debt renegotiation. Accounting and Business Research, 35 (1): 69-86, DOI: 10.1080/00014788.2005.9729663
  33. Scherer F.M., Beckenstein A., Kaufer E., Murphy R. 1975. The Economics of Multi-Plant Operation. Harvard University Press: Cambridge (Mass.).
  34. Schilit H.M., Perler J. 2010. Financial Shenanigans. McGraw Hill: New York.
  35. SEC. 2002a. Securities and Exchange Commission v. Xerox Corporation, published online.
  36. SEC. 2002b. Xerox settles SEC enforcement action charging company with fraud, published online.
  37. Sherman H., Young S.D., Collingwood H. 2003. Profits You Can Trust. Prentice Hall: Upper Saddle River.
  38. Shiller R. 1989. Market Volatility. MIT Press: Cambridge (Mass.).
  39. Shiller R. 2000. Irrational Exuberance. Princeton University Press: Princeton.
  40. Shleifer A., Vishny R.W. 2003. Stock market driven acquisitions. Journal of Financial Economics, 70 (3): 295-311, DOI: 10.1016/S0304-405X(03)00211-3
  41. Singh A. 1971. Takeovers. Cambridge University Press: Cambridge (UK).
  42. Smith T. 1992. Accounting for Growth. Century Business: London.
  43. Smith T. 1996. Accounting For Growth. Century Business: London.
  44. Stock Exchange. 1986/1987-1992/1993. Stock Exchange Official Yearbook. Macmillan: London.
  45. Sweeney P. 1994. Debt covenant violations and managers’ accounting response. Journal of Accounting and Economics, 17 (3): 281-308, DOI: 10.1016/0165-4101(94)90030-2
  46. Teoh S., Welch I., Wong T. 1998. Earnings management and the underperformance of seasoned equity offerings. Journal of Finance, 53 (6): 1935-1974, DOI: 10.1111/0022-1082.00079
  47. Times Books. 1991. The Times 1000, 1991-1992. Times Books: London.
  48. Watts R., Zimmerman J. 1986. Positive Accounting Theory. Prentice Hall: Englewood Cliffs.
  49. Whittington G. 2008. Fair value and the IASB/FASB conceptual framework project: an alternative view. ABACUS, 44 (2): 139-168, DOI: 10.1111/j.1467-6281.2008.00255.x

  • Historical perspectives on accounting for M&A Amir Amel-Zadeh, Geoff Meeks, J. Gay. Meeks, in Accounting and Business Research /2016 pp.501
    DOI: 10.1080/00014788.2016.1182703
  • Acquirers’ earnings management ahead of stock-for-stock bids in ‘hot’ and ‘cold’ markets Antonia Botsari, Geoff Meeks, in Journal of Accounting and Public Policy /2018 pp.355
    DOI: 10.1016/j.jaccpubpol.2018.09.007
  • History, statistics and theory: Frederic M. Scherer and modern industrial organization Giovanni B. Ramello, Francesco Silva, in ECONOMIA E POLITICA INDUSTRIALE 1/2014 pp.5
    DOI: 10.3280/POLI2014-001001
  • Historical Perspectives on Accounting for M&A Amir Amel-Zadeh, Geoff Meeks, Jaqueline Gay Meeks, in SSRN Electronic Journal /2015
    DOI: 10.2139/ssrn.2732253

Geoff Meeks, J. Gay Meeks, Mergers, accountants, and economic efficiency in "ECONOMIA E POLITICA INDUSTRIALE " 1/2014, pp 121-136, DOI: 10.3280/POLI2014-001007