Acquirers’ earnings management ahead of stock-for-stock bids in ‘hot’ and ‘cold’ markets

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.     

‘Slow-burn’ spillover and ‘fast and furious’ contagion: a study of international stock markets

‘Fast and furious’ contagion across capital markets is an important phenomenon in an increasingly integrated financial world. Different from ‘slow-burn’ spillover or interdependence among these markets, ‘fast and furious’ contagion can occur instantly. To investigate this kind of contagion from the US, Japan and Hong Kong to other Asian economies, we design a research strategy to capture fundamental interdependence, or ‘slow-burn’ spillover, among these stock markets as well as short-term departures from this interdependence. Based on these departures, we propose a new contagion measure which reveals how one market responds over time to a shock in another market. We also propose international portfolio analysis for contagion via variance decomposition from the portfolio manager’s perspective. Using this research strategy, we find that the US stock market was cointegrated with the Asian stock markets during four specific periods from 3 July 1997 to 30 April 2014. Beyond this fundamental interdependence, the shocks from both Japan and Hong Kong have significant ‘fast and furious’ contagion effects on other Asian stock markets during the US subprime crisis, but the shocks from the US have no such effects.     

Unveiling investor-induced channels of financial contagion in the 2008 financial crisis using copulas

Understanding how financial crises spread is important for policy-makers and regulators in order to take adequate measures to prevent or contain the spread of these crises. This paper will test whether there was contagion of the subprime financial crisis to the European stock markets of the NYSE Euronext group (Belgium, France, the Netherlands and Portugal) and, if evidence of contagion is found, it will determine the investor-induced channels through which the crisis propagated. We will use copula models for this purpose. After assessing whether there is evidence of financial contagion in the stock markets, we will examine whether the ‘wealth constraints’ transmission mechanism prevails over the ‘portfolio rebalancing’ channel. An additional test looks at the interaction between stock and bond markets during the crisis and allows us to determine if the transmission occurred due to the ‘cross market rebalancing’ channel or the ‘flying to quality’ phenomenon. The tests suggest that (i) financial contagion is present in all analyzed stock markets, (ii) a ‘portfolio rebalancing’ channel is the most important crisis transmission mechanism, (iii) and the ‘flight-to-quality’ phenomenon is also present in all analyzed stock markets.     

Accounting for self interest in the credit crisis

Taking as its starting point Alan Greenspan’s ‘shocked disbelief’ in the failure of institutional self interest to prevent the credit crisis, this paper sets out to explore two related questions. How was self interest constructed in financial markets? And how might we account for its failure? Conceptually the paper draws upon Callon’s (1998) analysis of ‘agent–networks’, the importance this gives to the agency of non-humans, and his complementary notions of ‘framing’/‘disentanglement’ and ‘overflowing’ as these allow and subvert the calculation of self interest. Empirically, the paper then presents a sketch of these processes in the rise and then fall of the market for collateralised debt obligations (CDOs) that was central to the credit crisis. The final substantive section of the paper reflects on the role and ‘hyperreal’ interaction of accounting and models as ‘mediators’ in these processes.     

Market power and firm risk: A test of the ‘quiet life’ hypothesis

This paper presents an empirical investigation of John R. Hicks' ‘quiet life’ hypothesis that firms in monopolistic markets will be more risk averse than firms in competitive markets. A sample of 6,500 unit banks is used in a multivariate regression analysis to test the relationship between market concentration and overall risk measured by the coefficient of variation, as well as certain financial ratios. Financial data are for the years 1969–1978. Test results are consistent with Hicks' ‘quiet life’ hypothesis. It is also notable that while most structure-performance studies in banking have found a quantitatively small effect of structure on performance, these results suggest that the effect may be fairly substantial.     

Successfully reshaping the ownership relationship by reducing ‘moral debt’ and justly distributing residual claims: The cases from Scott Bader Commonwealth and the John Lewis Partnership

This paper examines the issues relating to the most appropriate form of corporation ownership including organizational and cultural systems that will maximize the firm's value to society whilst maintaining a more sustainable market value. The paper argues that the maximization of firm value to society may be more readily achieved through a closed corporation type formation with better rights protection for all internal stakeholders, such as an employee-owned corporation or a limited liability partnership similar to Scott Bader Commonwealth and John Lewis Partnership, rather than a publicly-owned open corporation with large ‘moral debt’ claims, conflicts of interest, and agency costs. The four main perceived theoretical arguments against a closed corporation are: The horizon problem; the common-property problem; the non-transferability problem; and the control problem. Our analysis demonstrates how the Scott Bader Commonwealth and the John Lewis Partnership with support from the capital markets evolved successful solutions to the above theoretical issues. In other words, closed corporations such as Scott Bader Commonwealth and John Lewis Partnership with their better organizational and cultural systems can be considered to be more just at distributing residual and ‘moral debt’ claims than open corporations and thus are better at maximizing their value to society.     

Market selection with learning and catching up with the Joneses

We study the market selection hypothesis in complete financial markets, populated by heterogeneous agents. We allow for a rich structure of heterogeneity: individuals may differ in their beliefs concerning the economy, information and learning mechanism, risk aversion, impatience and ‘catching up with the Joneses’ preferences. We develop new techniques for studying the long-run behavior of such economies, based on Strassen’s functional law of the iterated logarithm. In particular, we explicitly determine an agent’s survival index and show how the latter depends on the agent’s characteristics. We use these results to study the long-run behavior of the equilibrium interest rate and the market price of risk.     

Accounting for the financialized UK and US national business model

In this paper we adopt a ‘business model’ conceptual framework grounded in accounting to describe the processes and mechanisms of national economic development and transformation. We locate national business models within a broad econo-sphere where they evolve and adapt to information arising out of stakeholder/institutional interactions. These interactions congeal into reported financial numbers that are presented as current income flows (income, expenditure), balance sheet accumulations and changes in net worth (assets and liabilities outstanding). We employ financial data from national accounts to specifically describe how the US and UK national business models have become financialized as ongoing capitalizations run ahead of earnings capacity. This process of interminable re-capitalization is conditioned by variable institutional and sub-institutional sector characteristics. However, in financialized national business models the system of accounting takes on added analytical significance because it ‘transmits rather than contains’ and ‘amplifies rather than dampens’ adverse financial disturbance as capitalizations are recalibrated up or down in secondary markets.     

Anglo-Saxon governance: Similarities,difference and outcomes in a financialised world

The increasing pervasiveness of financial markets across the global economy has been identified in the literature with the spread of ‘Anglo-Saxon capitalism’, reflecting the notion that a common US–UK model of governance and managerial attitudes is becoming increasingly common worldwide. This paper questions the existence of a common US–UK model by exploring how the concept of ‘Anglo-Saxon capitalism’ emerged and by highlighting the institutional differences in governance and managerial routines between the two countries. As the collapses of Lehman Brothers and Royal Bank of Scotland show, common outcomes, driven by international, financialised markets and actors, may mask important differences in managerial routines and attitudes towards risk.     

Expensive martingales

We characterize strictly arbitrage-free markets of European options where only a discrete set of options is traded. We then construct martingales which reprice all given options and which are ‘most expensive’ among all martingales with this property. We also present algorithms to adjust real-life market data and to construct expensive martingales while taking into account additional ‘weak’ information: estimated prices of more exotic products such as, for example, forward started options.     

Accountability and Transparency in English Local Government: Moving from ‘Matching Parts’ to ‘Awkward Couple’?

Although excessive transparency and accountability demands can have a counterproductive effect on organisational performance (Bovens, 2005), longstanding hierarchical accountability structures to ensure financial conformance in English local government continue to endure. Interestingly however, the previously top‐down regime for performance accountability in English local government has been replaced by bottom‐up mechanisms such as greater transparency and a more open market for public services. Using the framework developed by Hood (2010), this paper will show how such reforms mean that transparency and accountability are moving from being ‘matching parts’ to an ‘awkward couple’, and how this has significant implications for public services.     

Red chips or H shares: which China-backed securities process information the fastest?

This study examines the information flow between China-backed securities, namely H shares, red chips, Shanghai and Shenzhen listed common shares. We document several findings. We find that an exponential generalized autoregressive conditional heteroscedasticity in mean (EGARCH-M) model appears to describe adequately the return process of the China-backed securities. Our empirical findings show that both H shares and red chips (which are listed in Hong Kong) are more sensitive to ‘good’ news than ‘bad’ news, while stocks listed in the China market are more sensitive to ‘bad’ news than ‘good’ news. Using a multivariate EGARCH-M model, we have found significant return and volatility spillover effects among the China-backed securities. Our study indicates that the red chips appear to spread information to other China-backed markets ‘directly’ or ‘indirectly’. The results imply that the red chip market processes information faster than the other markets.     

The Loser's Curse: Accounting for the Transaction Costs of Takeover and the Distortion of Takeover Motives

Studies for major stock markets of share price movements in the period around a takeover show that target company shareholders typically experience large gains in wealth but that acquiring company shareholders do not. The reasons for this asymmetry–and, in particular, for the absence of gains for the shareholders of the companies which initiate the deal–are imperfectly understood. This note suggests one factor contributing to those results. It argues that accounting practice prescribed by the main standard setters is non‐neutral towards ‘successful’ and ‘unsuccessful’ bidders with respect to reporting the transaction costs of bidding. It shows how the prescribed accounting treatment of these costs affects performance measures used in salary contracts as well as in the markets for executives and for corporate control. The result is that the managers of bidding companies will have an ‘arti ?cial’ incentive to in ?ate their bid price or to go ahead with a bid which offers no bene ?t to their shareholders. Ironically, the main standard setters seem minded soon to prohibit the only accounting technique which does not distort these incentives.     

Changing conditions in the Hong Kong new issues market

This paper examines the Hong Kong IPO market from August 1995 to July 1999 and finds that the time of the June 30 1997 political handover coincides with the transition in the IPO market from ‘hot’ to ‘cold’. Although the handover was an anticipated event, an explanation for the change in market is that the political handover created uncertainty among investors; a type of information asymmetry where all investors faced greater uncertainty. Our finding provides empirical support to literature which proposes that events in the months preceding the October 27 1997 correction in Asian stock markets facilitated a decline in confidence in financial markets, subsequently characterised as the ‘Asia Financial Crisis’. In addition, we find initial returns of newly listed stocks in the Hong Kong market are associated with market condition but not associated with any particular industry (i.e., PROPERTY) or geographic location (i.e., ‘H’ SHARES) suggesting that the prevailing market condition was spread more generally across issues.     

Risk Management as Passionate Imitation: The Interconnections Among Emotions,Performance Metrics,and Risk in a Global Technology Firm

This paper traces the evolution of risk management practices in a global technology company between 2000 and 2015. We extend recent research that has highlighted the emotional aspects of riskwork. We detail how a passionate interest—‘we can do better at risk management’—emotionally ‘hooked’ the staff in the company's Sourcing Unit. Risk management, emotion, and management controls were intertwined. When top management singled out one of the key metrics clearly as a risk‐related metric for the Sourcing Unit, the employees felt a strong sense of relief, which gave rise to subsequent extensive risk measurement. We also contribute to the more general debate about accounting and its entanglement with emotions. Little is known about the ‘birth’ and the reasons for durability of passionate interests. Following Tarde (1903/2013), such ‘birth’ and endurance can be explained by analyzing how passionate imitation emerges as a result of a series of dislocal events—in our case a fire, new performance metrics, and natural disasters. These events triggered emotions that provided the necessary energy for three forms of passionate imitation: a) ‘we need to imitate our main competitor’ and risk mapping; b) ‘others in the organization are imitating us and our suppliers should imitate us’ and risk measurement; and c) ‘others in the organization (more specifically the Product Development Unit) should imitate us’ and proactive risk avoidance. This passionate imitation helped explain why the sourcing staff continued to be emotionally ‘hooked’ to risk management, that is, how the passionate interest endured and became vested.     

Toward a different debate in environmental accounting: The cases of carbon and cost–benefit

Many champions of environmental accounting suggest that calculating and internalizing ‘externalities’ is the solution to environmental problems. Many critics of neoliberalism counter that the spread of market-like calculations into ‘non-market’ spheres, is, on the contrary, itself at the root of such problems. This article proposes setting aside this debate and instead closely examining the concrete conflicts, contradictions and resistances engendered by environmental accounting techniques and the perpetually incomplete efforts of accountants and their allies to overcome them. In particular, it explores how cost–benefit analysis and the carbon accounting techniques required by the Kyoto Protocol, the European Union Emissions Trading Scheme and other carbon trading mechanisms ‘frame’ new agents, spaces, relations and objects, and what the consequences have been and are likely to be.     

Winning the worksite customer

As the UK financial services industry advances channel strategies in response to developments in regulation, technology and government policy, a number of systems are evolving. One such system is worksite distribution. The environment is set to facilitate the development of this channel and a good deal of activity is under way. Key environmental drivers include the legal obligation on UK employers regarding stakeholder pensions provision; the continuing erosion in state benefits and the recognition that individuals will almost certainly have to provide for themselves in retirement; and the culmination of IT infrastructure development. Along with a tight labour market and reduced access to financial advice for the ‘mass market’ as advisers turn their focus to high-net-worth individuals, the role of the employer and the workplace as a source of information and purchase power begins to make sense — in essence, the role of a ‘portal’. This paper takes a close look at the customer potential of worksite marketing — both employers and employees — and the technology challenge faced by providers in winning their business.Worksite distribution (also known as worksite marketing) is the latest distribution channel emerging in UK financial services. There has been much discussion over the last two years on the viability of this channel in the UK. These discussions initially focused on comparing the drivers in the UK to the different drivers behind the development of the channel in the USA. More recently, discussions have focused on UK activity and the scramble to secure (pre-register) stakeholder pension (SHP) clients. This flourish of provider activity may well account for the channel becoming a self-fulfilling prophecy, with many employers already being presented with a SHP or worksite proposition. ‘Best practice’ in this channel will be dependent on providing the best process for target customers — some lessons are learned from experience in other established markets and, importantly, from realising the inherent differences between the UK and these markets. This paper takes a deeper look at the subject and explores the worksite customer — who they are, how to win their business, and the enabling technology that will determine the outcome for financial service providers embarking on this channel.     

What determines the exit decision for leveraged buyouts?

How and when to exit portfolio company investments are critical choices facing private equity funds. In this paper we analyze 1022 European private equity exits, using information on fund and portfolio company characteristics, and on conditions in capital markets. For over 43% of the exits, private equity funds sold to each other and we analyze why such secondary buyouts have gained in popularity relative to IPOs and sales to corporate acquirers. We find that the exit route depends on various portfolio company characteristics, and that conditions in the debt and equity markets have a strong influence on exit choice. The existing literature has tended to portray the IPO is the “preferred” exit route. However, our analysis suggests this is mistaken: private equity funds take advantage of ‘windows of opportunity’, and the exit route that maximizes value varies with market conditions.     

The ‘performativity thesis’ and its critics: Towards a relational ontology of management accounting

This paper explores accounting's mediating role in bringing theoretical statements from economics into life. It addresses the so-called performativity thesis that claims that economic theory does not just observe and explain a reality, but rather shapes, formats and performs reality. Accounting mediates in that process by creating cognitive boundaries that embed societal practices in economic theory. However, the performativity thesis is not without criticisms. Its main criticisms concern a lack of proof of the thesis; an overestimation of the power of economics to extend beyond the virtual; and a lack of a critical stance. In order to bring more nuance in the discussion on the performativity thesis the paper reflects on evidence from the field of accounting. The review of accounting studies reveals how accounting, to different degrees, is implicated in strategic and operational activities in markets and organisations and how it is a performative mechanism of economisation. Moreover, in order to accentuate the ‘good’ in society and to challenge the ‘bad’, the paper suggests a further development of (critical) management accounting research into the performativity of both economics and other social theories. A relational ontology of management accounting that is in politics and that is sensitive to ‘unlocalisable’ virtual powers of social-historical formations of management accounting may be developed.