The Need for Due Diligence and Financial Statement Analysis – The Bank of America-Merrill Lynch Case

Mr. Ken Lewis, Chief Executive of Bank of America (BOA), was harshly questioned regarding BOA’s acquisition of Merrill Lynch. This was driven by an earnings release on January 16, 2009 indicating Bank of America had massive losses for the 4th quarter of 2008 due to the Merrill Lynch acquisition. Bank of America’s stock fell to $7.18, its lowest level in 17 years following the release of the earnings announcement. Complicating the matter was that the market capitalization of Bank of America, including Merrill Lynch, was just$45 billion, and Bank of American had offered $50 billion to acquire Merrill. These events led both insiders and outsiders to question the acquisition. What due diligence should have been completed and were there were relevant accounting policies and valuation issues of concern? In this case, students are placed in a decision-making role to provide a financial analysis considering different options and assessing the benefits and detriments of the acquisition. It provides students an opportunity to apply acquisition principles in a real-life setting

Transaction Complexity and the Movement to Fair Value Accounting

Our global economy has pushed the complexity of business transactions to a new level, as companies now employ sophisticated contracts and financial instruments. However, it is unclear whether accounting standards are able to effectively capture transaction complexity, which has been growing at a rapid pace. In this study, we examine three questions related to transaction complexity: (1) Do accounting standards reflect differences in the complexity of the transactions being recorded? (2) Does the use of mark-to-market (i.e., fair value) accounting reduce the complexity of standards by relying on market valuations to capture transaction complexity? (3) Does the reliance on fair value measurements reduce audit costs for transactions with significant complexity? Our findings suggest that complex transactions result in complex accounting guidance, making the standards difficult to read and understand. However, the use of fair value accounting might be a solution to the challenges arising from transaction complexity. Our study informs regulatory bodies, investors, creditors, and public companies that are increasingly concerned about the state of financial reporting standards, which arguably have become very costly to implement yet less effective in communicating the economic substance of complex transactions

Option compensation and optimism bias in management earnings forecasts

We examine the link between the managers' option compensation and the optimism bias in management earnings forecasts. More particularly, we are interested in investigating the extent of self-serving optimism in the earnings forecasts made by managers with a high amount of option compensation. We hypothesize that managements' optimism (optimism bias in their earnings forecasts) increases with an increase in their stock option compensation. We provide evidence that managers issue optimistic forecasts since their compensation is a function of the stock price, and optimistic earnings forecasts usually result in a higher share price

An investigation to infer social welfare implications from the market reactions to SFAS no. 52

Includes bibliographical references (p. 14-15)

The effects of annual accounting data on stock returns and trading activity : a causal model study / 1203

Includes bibliographical references (p. 22)

An empirical test of a simple measure of the quality of accounting earnings

Includes bibliographic references (p. 23-24)

The effect of self-selection bias on the testing of a stock price reaction to management earning forecasts

Includes bibliographic references (p. 25-26)