Mergers, Accountants and Economic Efficiency

15 Pages Posted: 28 Dec 2013

See all articles by Geoff Meeks

Geoff Meeks

University of Cambridge - Judge Business School

Jaqueline Meeks

University of Cambridge - Centre for Development Studies

Date Written: December 26, 2013

Abstract

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 are available to the acquirer’s executives to fill “cookie jars” ready to inflate earnings in the years after merger. After takeover, modern accounting provides opportunities for newly appointed managers to 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); 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 Classification: G34, L25, M12, M41

Suggested Citation

Meeks, Geoff and Meeks, Jaqueline, Mergers, Accountants and Economic Efficiency (December 26, 2013). Available at SSRN: https://ssrn.com/abstract=2372028 or http://dx.doi.org/10.2139/ssrn.2372028

Geoff Meeks (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+44 (0) 1223 764226 (Phone)
+44 (0) 1223 339701 (Fax)

Jaqueline Meeks

University of Cambridge - Centre for Development Studies ( email )

7 West Road
2nd floor, Alison Richard Building
Cambridge, CB3 9DT
United Kingdom

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