Abstract

http://ssrn.com/abstract=2259039
 
 

References (94)



 


 



Compliance, Detection, and Mergers and Acquisitions


Vivek Ghosal


Georgia Institute of Technology; Center for Economic Studies and Ifo Institute for Economic Research (CESifo)

D. Daniel Sokol


University of Florida - Levin College of Law; George Washington University Law School Competition Law Center

May 1, 2013

Managerial and Decision Economics 34(7) 2013
Minnesota Legal Studies Research Paper No. 13-21

Abstract:     
Firms operate under a wide range of rules and regulations. These include, for example, environmental regulations (in which some industries have increased regulatory exposure) and finance and accounting (where all industries have reporting requirements). In other areas, such as antitrust cartels, enforcement is unregulated and antitrust leaves the market as the default tool to police against anti-competitive behavior. In all of these areas, detection of non-compliance by a firm can result in significant penalties. This issue of non-compliance has implications in the merger and acquisitions (M&A) context. In a transaction between an acquiring firm (buyer) and a target firm (seller), there is asymmetric information about the target’s quality. In our framework, we link a target’s quality directly to the strength of its regulatory compliance. In an M&A transaction, an acquirer seeks information about the target’s compliance, as a compliance failure may result in substantial penalties and sanctions, post-acquisition. In the presence of quality (compliance) uncertainty about target firms, low quality targets can masquerade as high quality. This would tend to give rise to a M&A market with Lemons-like characteristics, resulting in low transactions prices and dampening of M&A activity. We examine how M&A transactions in such regulatory areas – environmental, finance and accounting, and antitrust compliance problems – might function to alleviate quality uncertainty.

Number of Pages in PDF File: 47

Keywords: corporate compliance, corporate strategy, Lemons markets, mergers and acquisitions, environmental regulations, securities regulations, accounting, antitrust, cartels, white collar crime

JEL Classification: G34, K21, K22, K32, L40, M21

Accepted Paper Series


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Date posted: May 2, 2013 ; Last revised: June 22, 2013

Suggested Citation

Ghosal, Vivek and Sokol, D. Daniel, Compliance, Detection, and Mergers and Acquisitions (May 1, 2013). Managerial and Decision Economics 34(7) 2013; Minnesota Legal Studies Research Paper No. 13-21. Available at SSRN: http://ssrn.com/abstract=2259039 or http://dx.doi.org/10.2139/ssrn.2259039

Contact Information

Vivek Ghosal
Georgia Institute of Technology ( email )
School of Economics
221 Bobby Dodd Way
Atlanta, GA 30332
United States
404-894-4910 (Phone)
404-894-1890 (Fax)
HOME PAGE: http://www.econ.gatech.edu/people/faculty/ghosal/
Center for Economic Studies and Ifo Institute for Economic Research (CESifo)
Poschinger Str. 5
Munich
Germany
HOME PAGE: http://www.cesifo.de
D. Daniel Sokol (Contact Author)
University of Florida - Levin College of Law ( email )
Spessard L. Holland Law Center
P.O. Box 117625
Gainesville, FL 32611-7625
United States
(352) 273-0968 (Phone)
(352) 392-3005 (Fax)
HOME PAGE: http://www.law.ufl.edu/faculty/d-daniel-sokol
George Washington University Law School Competition Law Center ( email )
200 H Street, NW
Washington, DC 20052
United States
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