How accounting fraud has changed merger valuation

Jeff Madura and Thanh Ngo

Applied Financial Economics, 2010, vol. 20, issue 12, 923-940

Abstract: The accounting fraud of Enron and other firms prompted acquirers to be more diligent before investing in companies. The fraud also led to the creation of the Sarbanes-Oxley Act (SOX), which contains provisions that require more due diligence for firms that pursue mergers. We document significant changes in the behaviour and valuation of mergers since SOX. Acquirers rely more heavily on financial and legal advisors, while targets rely more heavily on financial advisors. The total premium (which includes the target's stock price run up) that acquirers pay for targets is significantly lower since SOX. The long-term stock price performance following mergers is more favourable (or less unfavourable) since SOX, regardless of the horizon used to measure long-term stock price performance. Whether the more conservative pursuit of targets by acquirers is voluntary or forced by SOX provisions, acquirer decision making has improved since the accounting fraud.

Date: 2010
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DOI: 10.1080/09603101003724299

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