Delegated Bidding and the Allocative Effects of Alternative Accounting Rules

61 Pages Posted: 4 Oct 2014 Last revised: 21 Oct 2018

See all articles by Ivan Marinovic

Ivan Marinovic

Graduate School of Business, Stanford University

Date Written: October 5, 2014

Abstract

This paper studies the efficiency and distributive effects of three prominent accounting methods in auction settings when bidders’ incentives are linked to accounting income. The purchase price method (PP) requires the acquirer to book the acquisition at historical cost, thereby underestimating the asset value by the amount of the acquirer’s surplus in the transaction. The exit value method (EV) is downward biased and forces the acquirer to book an accounting loss on the date of acquisition. EV connects otherwise independent valuations inducing a reporting-based winner’s curse and can even lead to fire-sale-like values. Relative to PP, EV implies lower asset prices, a decrease (increase) in the surplus of the seller (acquirer), and an increase in the probability that the asset attains its best use when the market is sufficiently competitive. Finally, I examine an alternative method in which the asset is valued at its perceived value-in-use (VU). Under this method, the acquirer bids more aggressively to increase perceived value-in-use, leading to a shift of surplus from the acquirer to the seller. Yet VU is unbiased and always maximizes the probability that the asset attains its best use.

Keywords: Fair Values, Auctions, Accounting, Real Earnings Management

JEL Classification: D82

Suggested Citation

Marinovic, Ivan, Delegated Bidding and the Allocative Effects of Alternative Accounting Rules (October 5, 2014). Management Science, Volume 63, Issue 7, July 2017 . Available at SSRN: https://ssrn.com/abstract=2505002 or http://dx.doi.org/10.2139/ssrn.2505002

Ivan Marinovic (Contact Author)

Graduate School of Business, Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
91
rank
276,845
Abstract Views
1,123
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information