Rigid or flexible accounting rules? : evidence from purchase price adjustments

[摘要] I examine the negotiation of accounting rules in the purchase price adjustment clause of corporate acquisition agreements. Purchase price adjustments make the deal value contingent on the target;;s closing working capital or net worth. Some purchase price adjustments use ;;rigid;; accounting and specify which measurement rules will be used to prepare the closing-date balance sheet. Many more use ;;flexible;; accounting and require only GAAP compliance. I provide evidence that hidden action and adverse selection problems determine whether the buyer and seller use rigid or flexible accounting. I also provide evidence that this choice is associated with other features of the contract related to purchase price adjustment flexibility and to the prospect of hold-up. Estimates of the effect of rigid accounting on finalized purchase price adjustments are consistent with implications of the adverse selection and hold-up problems.

[发布机构] Massachusetts Institute of Technology