Accounting standards may play a significant role in shaping cross-border mergers and acquisitions, according to a recently released academic study.
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Researchers from the University of Missouri at Columbia and the University of Arkansas teamed up to take a closer look into international accounting standards to try to find out what deters firms from pursuing growth opportunities in foreign markets.
The study, which was presented during the American Accounting Association’s annual meeting, examined cross-border M&A deals stemming from 32 countries that took place from 1998 to 2004. The report showed that the volume of M&A activity was higher for countries that had comparable generally accepted accounting principles.
The study revealed that the premium takeover price is typically greater if the target countries’ GAAP is identical to the country of where the acquirer is based.
The authors of the study also found that International Financial Reporting Standards, which were implemented in 2005, generated more cross-border deals between IFRS-adopting countries. The increase in deal activity within the IFRS countries is more distinct for countries with minor similarities in GAAP in the pre-IFRS approval period.
The report showed that a majority of cross-border transactions where the accounting standards are identical took place between U.S.- and U.K.-based companies, as well as Canadian companies. There were approximately 1,980 deals that generated roughly $174 billion in value between the U.S. and the U.K. between 1998 and 2004. Within the same time frame, there were 1,935 deals between Canada and the U.S., which pulled in close to $106 billion in deal value.
The study concluded that its findings are in line with the idea that similar GAAP reduces information cost. As a result, the competition between bidders increases, which causes target shareholders to come out on top with higher gains.