The Effects of Accounting Fraud on Merger
in Sudanese Industry
The accounting fraud of Enron and Worldcom in the United States has changed the way companies deal with merger. This fraud led to the creation of the Sarbanes– Oxley Act (SOX) in 2001, which contained numerous provisions changes for firms that pursue mergers. This paper documents significant changes in the behavior and valuation of mergers since SOX, like the fact that acquirers rely more heavily on financial and legal advisors now, while targets rely more heavily on financial advisors. The consideration that acquirers pay for targets is significantly lower since SOX, as it usually used to be overvalued most of the time before SOX. The long-term stock price performance following mergers is more favorable since SOX, regardless of the method used to measure long-term stock price performance. Whether the more less risk taking pursuit of targets by acquirers is voluntary or forced by SOX provisions, acquirer decision making has improved dramatically since the accounting fraud and the introduction of SOX.
Before 2001, firms were not as closely monitored by investors, and were more likely to make decisions without reasonable and properly monitored steps. But Since the financial fraud by Enron, major changes have occurred in financial markets. First, investors recognized that they must be more careful when valuing stocks. Second, investment banks were criticized for assigning high ratings to companies in order to generate more investment banking business. The Securities and Exchange Commission (SEC) imposed new guidelines to prevent conflicts of interests in investment banking and protect investors, the Sarbanes– Oxley Act (SOX) requires acquirers to do an intense pre-close investigation of targets, and to assess the target’s internal controls, financial reporting, procedures and documentation. Failure to comply with SOX could cost executives their jobs, fines and even jail time. Our objective is to determine whether merger behavior and valuations have changed since SOX, and to what degree we can measure and conclude these changes in merger valuations.
We develop hypotheses regarding possible changes in the behaviour or market perception of mergers since SOX. We emphasize at the outset that any changes since SOX could also be attributed to the use of more voluntary monitoring by acquirers or to the shift in investment bank guidance on mergers. All hypotheses are driven by changes in financial markets since the accounting fraud of 2001 that could help managers and board members be more capable and diligent managers, and could align their goals with shareholders. However, we acknowledge that even after regulatory changes, managers or board members could make self-serving decisions that are disguised by faulty validation. Alternatively, their merger decisions may be well intended, but the extra monitoring does not necessarily improve their selection or valuation abilities. Thus, every hypothesis that suggests improvements in the behaviour or market perception of mergers has a counter that no amount of internal reporting, monitoring or control will make managers smarter or more willing to serve shareholder interests instead of their own.
Our hypotheses focus...
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