Geoff Meeks

THE EXCHANGE RATE AND COMPANY FAILURE IN A MACRO-MICRO MODEL OF THE UK COMPANY SECTOR*

A macro-micro model is presented which is used to predict company failure. It bridges the gap between previous macroeconomic models and the microeconomic approach to company failure in the finance literature: it can trace the probable effects of exogenous macroeconomic shocks upon the finances and the viability of individual members of the company sector. A series of simulation exercises using this model quantifies the impact of variations in the exchange rate upon the failure rate among the top one hundred U.K. companies. This impact is shown to be substantial, asymmetric, and at times nonlinear. Copyright 1991 by Royal Economic Society.

Bank Failure, Mark-to-Market and the Financial Crisis

This paper is concerned with the allegation that fair value accounting rules have contributed significantly to the recent financial crisis. It focuses on one particular channel for that contribution: the impact of fair value on actual or potential failure of banks. The paper compares four criteria for failure: one economic, two legal and one regulatory. It is clear from this comparison that balance sheet valuations of assets are in two cases crucial in these definitions, and so the choice between “fair value” or other valuations can be decisive in whether a bank fails; but in two cases fair value is irrelevant. Bank failures might arise despite capital adequacy and balance sheet solvency due to sudden shocks to liquidity positions. Two of the most prominent bank failures cannot, at first sight, be attributed to fair value accounting: we show that Northern Rock was balance sheet solvent, even on a fair value basis, as was Lehman Brothers. The anecdotal evidence is augmented by empirical tests that suggest that mark-to-market accounting does not increase the perceived bankruptcy risk of banks.

Bank Failure, Mark-to-market and the Financial Crisis: Bank failure, Mark-to-market and the Financial Crisis

This paper is concerned with the allegation that fair value accounting rules have contributed significantly to the recent financial crisis. It focuses on one particular channel for that contribution: the impact of fair value on the actual or potential failure of banks. The paper compares four criteria for failure: one economic, two legal and one regulatory. It is clear from this comparison that balance sheet valuations of assets are, in two cases, crucial in these definitions, and so the choice between ‘fair value’ or other valuations can be decisive in whether a bank fails; but in two cases fair value is irrelevant. Bank failures might arise despite capital adequacy and balance sheet solvency due to sudden shocks to liquidity positions. Two of the most prominent bank failures cannot, at first sight, be attributed to fair value accounting: we show that Northern Rock was balance sheet solvent, even on a fair value basis, as was Lehman Brothers. The case study evidence is augmented by econometric tests that suggest that mark�?to�?market accounting has had only a very limited influence on the perceived failure risk of banks.

Self-Fulfilling Prophecies of Failure: The Endogenous Balance Sheets of Distressed Companies

This article analyses a problem at the intersection of accounting, law, and economics: the economically efficient operation of legal arrangements for company failure is undermined because valuations of assets and liabilities become unstable once a firm is distressed. The paper draws on the three disciplines to show the pivotal role of asset and liability valuations in answering the legal question, whether the firm is insolvent, and the economic question, whether the firm should fail and its assets be redeployed to an alternative use. U.S. and U.K. evidence reveals a disconcerting indeterminacy in these processes: the probability that a firm will fail affects significantly the valuations assigned to assets and liabilities; but at the same time the valuation of assets and liabilities itself determines the probability of failure. This balance sheet endogeneity is then shown to delay economically efficient management changes under debtor-oriented U.S. Chapter 11, and to induce unnecessary costly bankruptcy with creditor-oriented U.K. receivership/administration. Recent cases trace this endogeneity in failures involving often controversial countermanding of huge financial claims.

Reporting to Shareholders: The Proposals in the Company Law Review

This paper assesses some of the proposals of the Company Law Review for financial reporting. It focuses on acute reporting problems arising from three developments which have gained pace since company law was last reviewed: the rapid inter-penetration of national equity markets; the growing demand for reporting of future prospects; and the surge of financial contracts relying on numbers from the annual report. These developments and their associated problems are outlined first; then the Reviews proposals are assessed against them.

Measuring Fair Value when Markets Malfunction: Evidence from the Financial Crisis.

In this paper we focus on fair value measurements in the Financial Crisis and its (continuing) aftermath. We consider different ways of measuring fair value; and we use the experience of economies under stress, and where markets deviate significantly from textbook models of symmetric information and perfect competition, to trace some perverse economic consequences of fair value measurement choices prescribed by accounting standard setters. We draw on anecdotal and case evidence from the banking crisis and its aftermath for the wider economy. The discussion focuses particularly on banks’ balance sheets and then on pension liabilities across all sectors.

Theories Came and Went, Good Data Endured: Accounting at Cambridge

This chapter explores the unusual symbiosis between accounting and economics in the first century of the Cambridge Economics Faculty. Faculty members have pushed back the boundaries and extended the scope of accounting in many directions, developing accounts to inform branches of economics ranging from macroeconomics to industrial and environmental economics, and deploying economics to enlighten accounting. The impact of the Faculty’s work is seen in, inter alia, the decisions of Nobel Prize Committees, the work of national finance ministries, the policies of industrial and accounting regulators, and the education of many of the leading practitioners in the accountancy profession.

Stewardship and Value Relevance in Accounting for the Depletion of Purchased Goodwill

This study investigates the value relevance of goodwill accounting numbers disclosed in annual reports in the UK under UK-GAAP and IFRS. We exploit a natural experiment unique to the UK to explore the link between the adoption of the impairment-only regime and changes in the value-relevance and timeliness of goodwill-related accounting amounts. Our results suggest that goodwill impairment, in contrast to goodwill amortisation, is negatively associated with market values and that goodwill is value relevant in the year of purchase, but that its value relevance decays in subsequent years. However, goodwill impairments appear only partially timely to the market and investors seem to have assigned higher reliability to the more stringent impairment test under UK GAAP compared to IFRS.

Why Are Banks Paying So Little UK Corporation Tax

This note explores the dramatic fall in receipts of UK Corporation Tax (UKCT) from banks, and the wide gap between the corporation tax accruals recorded in banks’ financial statements, and the UKCT receipts recorded by the tax authorities. It reviews changes in tax rates, in operating profits, in pre-tax profits (allowing for tax-deductible asset impairments), and in the share of profit originating in, or recorded in, overseas jurisdictions. It assigns significant roles to impairments and to overseas profits, and suggests that the recovery in banks’ global operating profits will not be accompanied by an early sharp recovery in UKCT receipts.

The Convergence of the Chinese and Western Takeover Markets

The evolution of the Chinese takeover market and its integration with the international takeover market are analysed in three ways. First, the paper charts the legal and institutional changes in China in the last two decades to develop a decentralised “Anglo-Saxon” takeover market. Second, the paper provides statistical and case material on the extent to which the Chinese takeover market has in practice become aligned with that of the US and UK. And, third, it presents case evidence on early failure and success in attempts to integrate the domestic with the world takeover market.