Matthew Shaffer

This paper provides an overview of valuation multiples in M&A advisory. I review prior literature and legal controversies and the theoretical basis for their role. I then standardize all the advisor multiples available in SDC Platinum along four dimensions, and report rich descriptive statistics on each dimension over time and across industries. I highlight seven findings that are notable in light of current research and debates, and identify opportunities for future research. This paper answers the call from Gow, Larcker, and Reiss (2016) for thorough descriptive research, to provide a foundation and prompts for future hypothesis development and tests.

In U.S. M&A, target directors are effectively required to consider third-party financial valuations, summarized in a “fairness opinion,” before accepting a takeover offer. Critics argue that these valuations are not relevant for public companies, which can assess the desirability of the deal in terms of the market premium. I identify conditions under which a target’s pre-deal market price will not provide directors with sufficient information to assess a takeover offer, and test for whether fairness valuations provide incrementally relevant information. I find they can impound expected transaction synergies and unravel abnormal runups in the target’s stock price prior to the announcement, and may signal ex ante fundamental mispricing. I also find that providers bias their valuations to cater to their clients. This suggests that third-party fundamental valuation has a plausible role in the governance of public-company takeovers, and has flaws in its current implementation

This paper advances a new framework for understanding a use case for financial accounting, as anchoring Schelling points for institutional valuations. 'Institutional' denotes cases in which valuations are advanced to persuade parties to a collective agreement, such as M&A and bankruptcy. The parties in such settings face a problem with elements of a Keynesian beauty contest. The solution is a Schelling point, a choice that parties anchor on because they expect others to do the same for the same reason. A key question in such games is how that higher-order belief is grounded. Financial reporting has the properties that classically create Schelling points. I test the theory that financial statements form Schelling points for institutional valuations using the setting of M&A valuation disclosures. I find that M&A advisors predominantly use trailing multiples, of reported measures, even though it is common knowledge (to both the advisors and their prospective opponents) that forward multiples are better for accurate valuation. This is more pronounced in deals with more salient coordination and higher-order belief problems. Alternative explanations based on prior frameworks are ruled out. I contribute by explaining valuation practice in M&A, and introducing this framework for understanding how accounting functions in such settings.

After decades of de-prioritizing shareholders’ economic interests and low corporate profitability, Japan introduced the JPX-Nikkei400 in 2014. The index highlighted the country’s “best-run” companies by annually selecting the 400 most profitable of its large and liquid firms. We find that managers competed for inclusion in the index by significantly increasing return on equity (ROE), and they did so at least in part due to their reputational or status concerns. The ROE increase was predominantly driven by improvements in margins, which were in turn partially driven by cutting research and development (R&D) intensity. Our findings suggest that indexes can affect managerial behavior through reputational or status incentives.

Recent years have witnessed significant growth in corporate sustainability reporting. Yet existing research provides mixed evidence on the information content of these reports for investors. We examine the stock market reaction to the announcement of corporate sustainability reports incorporating SASB metrics that are intended to provide financially material and decision useful information to investors. Using standard measures, we are unable to find compelling evidence that these reports provide a significant amount of decision-useful information to investors. Further analysis of a subset of common metrics indicates that they are either financially immaterial or preempted by traditional financial disclosures. Finally, we show that firms target sustainability reports at a broad set of stakeholders concerned with environmental and social impacts and conclude that a narrow focus on financial materiality to investors is unnecessarily restrictive.