Accounting Differences Dampen Cross-Border Mergers

Companies are more likely to make acquisitions in countries that follow similar financial-reporting standards, a study finds.
Kathy HoffelderOctober 8, 2012

Dissimilar national accounting standards and the lack of adherence to international financial reporting rules seem to deter companies from doing mergers and acquisitions beyond their national borders, according to a recent study by researchers at the University of Arkansas and the University of Missouri at Columbia.

Based on M&A deals in 32 countries between 1998 and 2004, the study found that differences in versions of generally accepted accounting principles used by acquirers and potential targets in different countries can decrease the number of mergers. The difference in standards might make it harder for acquirers to identify value-creation opportunities in the first place and to integrate acquisitions, says Shawn Huang, assistant professor at the University of Arkansas and a co-author of the study.

The study showed that more transactions occurred when the acquirer and the target operated under similar versions of GAAP and when both companies’ standards were comparable to international accounting standards. That’s because cross-border acquisitions by companies in countries with similar accounting structures tend to relieve CFOs and other senior executives of financial and administrative burdens, says Huang.

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In particular, the study found that a high number of transactions occurred involving companies in the United States and the United Kingdom, where accounting standards are similar. During the survey’s sample period, there were 1,980 U.S. cross-border M&A transactions targeting UK companies, worth a total of $175 billion. Eighty-one percent of the 21 accounting standards examined in the study were similar in the U.S. and the UK.

In contrast, only 48% of the accounting standards in the United States and Germany were similar, and during the period studied, U.S. companies merged with or acquired only 877 German companies (worth $79 billion in all).

Strong regulatory enforcement of local GAAP standards also boosted the number of cross-border M&A transactions that occurred during the study period, the researchers found.