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The recent multiple mergers between securities markets

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Date added: 17-06-26

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Abstract. In this paper I analyze the recent international consolidations between securities stock exchanges, considering the complex consequences on the perceived and actual accounting quality of listed European companies in the context of a different regulatory regime from that of the US companies. Considering the evolution of the trading platforms in the last decade, we are dealing with global securities stock exchanges that have a major impact on the financial statements presentation, preparation and analysis and thus on the perceived accounting quality. In order to obtain robust result, I perform a review of potential methodologies that may assist in completing the study, highlight the advantages and disadvantages of each one and conclude in proposing the most adequate to be used in answering the research question.

Keywords : Securities markets, mergers and acquisitions, accounting quality, research method.


The recent multiple mergers between securities markets in the US and Europe represents a new phenomenon with complex effects over the accounting profession, which offers the possibility of undergoing research on the consequences over financial statements perceived quality(earnings quality). If we are to ask why and to whom is of interest the quality of financial reporting, the obvious response would be to those who use the financial statements for contracting purposes and for investing decisions (Schipper et al., 2003). Thus, the event of interest for this paper refers to the 2007 New York Stock Exchange and the EuroNext Stock Exchange merger and formation of the first common trading platform of US and Europe. This means that the accounting information prepared under different accounting standards competes qualitatively, portraying to different types of investors the "true and fair view" of the companies' financial state. This difference is due to the existence of different accounting standards for the companies in US and Europe, namely USGAAP and IFRS. After the 2005 IFRS adoption by the EU, steps taken by the Financial Accounting Standards Board (FASB) and the International Financial Standards Board (IASB) were in the direction of convergence between the USGAAP and IFRS, but to this date significant differences remain. Thus, we deal with a setting prone to debates over the superiority of financial information and we have to decide if the merging phenomenon has or not an impact on investors' behavior and conversely over companies' earnings quality and thus cost of capital (Stulz, 1999).


In the domains of mergers and acquisitions and cross-listings a substantial number of articles have been published concerning the characteristics of securities markets and their different regulatory systems. A exhaustive view of the matter can be found in Coffee(2000), which defines the need for consolidation and makes an analysis of the stock exchanges concerning their regulation and incentives to attract for trading companies with specific characteristics. More specific, the empirical studies have found that the US regulatory regime proves itself very efficient and thus the minority shareholders benefit from greater protection, the market liquidity is increased and the companies' value is higher (Doidge et al., 2009, Benos et al., 2004). The accounting literature in the domain of mergers and acquisitions has yet to focus on a fairly new phenomenon that has as result the creation of conglomerate international stock markets that are largely eliminating the investment barriers and sustaining the positive effects of diversification. The gap in the literature is covered by this paper, tackling a new and very important phenomenon which needs to be explored from an accounting point of view. My first hypothesis is connected to the post merger perceived accounting quality, specifically to earnings quality and their impact on the valuation of stocks.

H1: The post merger perceived earnings quality of US companies is superior to European companies.

My second hypothesis is constructed in order to evaluate the post merger increase in financial analysts' coverage of the US listed companies. It has been stated in the accounting literature that listing in the US, and especially on the NYSE offers an increase in visibility for a firm, meaning that the financial analysts interest in the performance of the listed company increases (Baker et al., 2002). As a consequence, the earnings quality of the company increases. Following the consolidation of the stock market, the overall interest of both US and European financial analysts on the European companies did not registered a modification, due to the lack of perceived increase in accounting quality.

H2: The post merger US and European financial analysts' interest in the financial statements of European companies is constant.

After the merger, the attention of the European investors headed towards the US companies and thus the demand for forecasts grew. The European financial analysts have got to satisfy the increase in demand, that leading to a rise in the monitoring of US companies, which is used in the literature as a proxy for earnings quality. Practically, firms that are highly monitored by analysts present lower levels of earnings management and thus higher earnings quality. So, NYSE listed companies, which prior to the merger were regarded as having higher accounting quality (Siegel et al., 2005, Reese et al., 2002 ) will keep or improve this characteristic, whilst the European ones are not going to benefit from the synergy of the merger, because of the different regulatory regimes and constant analyst coverage.

H3: The post merger US and European financial analysts' interest in the financial statements of US companies is increasing.

While the coverage of US companies is increasing, they are continuingly regarded as having higher earnings quality than the European companies and thus become yet more appealing to financial analysts because their earnings are easy to forecast, due to the lack of earnings management and thus higher quality that the non-Us companies(Smith et al., 1997). Due to this post merger phenomenon, more European analysts are going to be drawn to follow an increasing number US firms.


In order to investigate the effects of the mergers between securities markets, I need to define the proper research method to answer our question completely and adequately. In accounting research there are employed many different research methodologies to an array of different contexts. Thus, I am discussing the multiple advantages and various weak points of four research methods. To this purpose I consider one quantitative and three qualitative methodologies, namely Propensity Score Matching Models(PSM), Case Study, Comparative Analysis and Grounded Theory. I will begin by assessing the appropriateness of using a quantitative research method in verifying the stated hypotheses. I am considering for this purpose the Propensity Score Matching Models (PSM) method, which is generally used in order to provide unbiased estimation of treatment effects. Practically, when we want to compare different samples in order to study the effect of a restrained number of characteristics of the specific treatment (in our case the post merger difference in earnings quality for the European companies) we use PSM in order to mitigate the bias in our samples, which is due to the difference in traits between the samples. When performing usual matching, we try to set the treatment and control groups in order to have as difference a single characteristic of interest. Still, in reality, we might encounter situations (as in our case) in which the two groups are not overlapping sufficiently, and then we obtain substantial error in our model. Thus, when we do not have an exact overlapping of the matching models, few units of our group are comparable to the treatment units and the units have to be compared across a high-dimensional set of pre-treatment characteristics, we use PSM in order to yield balanced samples which are adequate for testing. In our setting, in order to test our hypotheses, we apply a matching model approach between the US and European companies that are listed on the new NYSE EuroNext merged stock exchange. The problem is that, for us to study the effect of different earnings quality between the two categories, we should have balanced samples to match. Because many of the characteristics of the listed companies in US differ from those of the listed companies in EuroNext, we apply PSM in order to avoid obtaining a substantial bias in our estimation of the treatment effects. The same difference in samples we can find when considering the US and European financial analysts. Also, in the case of the existence of nonlinearities in the underlying functional form, PSM mitigates their potential impact. Thus, this method has serious advantages in being used for the purposes of this paper, but in order to make a reach a definite conclusion, we have to consider its disadvantages. One of the weak points of this approach is that it requires that group overlap to be substantial, even if it represents an improvement to the normal Matching Models. Thus, for our purposes it may be difficult to use it due to the significant differences in our considered population (companies and financial analysts). Another problem with PSM is the fact that we can introduce supplementary hidden bias, because the matching is performed on observed variables, and so the unobserved confounders may add inconsistency in our estimates. Also, from a quantitative point of view, the generalization of the results at the level of the whole population may be difficult because the matching is performed on small subsamples and we are faced with a tradeoff between the identification of the treatment effects and generalization. Moreover, I am not convinced of this method's ability to answer the research question, because in order to do so it would need to perform a more in depth analysis of the phenomenon and not only to study an incremental modification of a population characteristic. All in all, even if in certain conditions PSM is a valid and extremely useful research method, for the purpose of this article it is not adequate because it is not studying the consequences of the merger in depth. After performing the analysis of a quantitative research method, I focus on the use of a different approach, namely a qualitative research method. Thus, I begin the analysis of the Case study as a valid methodology for answering the research question. This approach would allow the developing of an in-depth description and analysis of a particular case or multiple cases (Creswell, 2007). Through case studies, we can understand in detail the effects of the merging phenomenon in a specific organization. The case study can produce very fruitful insight into particular organizations and provides the means of undergoing a very thorough analysis of the researched topic. To serve the interests of this paper, a multiple case studies approach should be adopted in a big European and correspondingly a big US financial analysis company, in order to determine the extent to which the analysts perceive the level of accounting quality in the two categories of firms. When performing research based on a case study methodology we should be aware of the systematic data collection and analysis process that gives an objective character to the research, contrary to the assumptions of subjectivity that are often stated about the qualitative research. Using this research method would determine also an easier access to the required data, because the results of the study will be tangible and the companies will be open towards the researchers due to the valuable character of this type of research for an organization (Avison et al., 2003). Having free access to the data is very useful in our case, because studying such a complex matter requires multiple data sources, such as documents, interviews and observations. Another advantage represented by the use of this method is the fact that the researcher can isolate the desired characteristic of interest (in our case the accounting quality and the increased attention offered by the financial analysts to US firms) and better understand its underlined motivations and its variations in magnitude. The disadvantages of using a case study are represented by the lack of generalization power of the approach, considering the fact that our analysis is performed on one or two organizations. Still, concerning our research interest, the two organizations that are considered can be chosen in such a way that through their size and representativity to guarantee that are at least partially generalizable. Nonetheless, if we fail to assure that the analyzed companies poses the two traits (and we may well find ourselves in this situation due to the difficulties encountered in general by the qualitative researchers in trying to obtain access into companies) our results will certainly lack the potential of being generalized. Another problem with conducting case studies is related to the fact that the researcher is wholly connected to the studied company and this can cause problems concerning the bias introduced into the data due to his implication in the company for a long period of time. Nevertheless, the implication of the researcher is crucial if we want to address issues that cannot be tackled using different research methods. All in all, the case study (with the specification of a multiple case study in the context of our research) represents a very encompassing way of doing research when focusing on a bounded system on which to undergo an in-depth study. The third discussed research method is represented by Comparative Analysis. When considering this method, we must be aware of the fact that it resembles to an extent with the case study method, but it comes, in our specific conditions, as a completion that helps us better support our findings and test our hypotheses. Because I believe that the connection with the case studies method is extremely important for the present paper, I will continue to evaluate both methodologies in connection. One of the main advantages of Comparative Analysis and the plus added by its use is that we are able compare multiple characteristics between organizations, having a more holistic view over the data. Also, for enabling us to accept and to reject hypotheses we can use the method of acceptance and method of differences. In what drawbacks are concerned, this method does not allow the researcher to explore the data in the companies into the same depth as in the case study approach. We are limited at spotting the similarities and differences between entities and the specific traits that have a unique character can be overlooked. This method, similarly to the case study approach, has a problem with the size of its sample (even if it is usually larger than in the case of the case studies) and it can be hard to generalize the obtained results. The only way through which we can mitigate this problem would be to carefully select the firms that we include into our study. Also, when performing research over a large sample of organizations we might find ourselves in a very time and resource consuming situation that could be quite a challenge for the researcher, making him to eliminate companies from the sample, thus losing a lot of information, because of the methodology design issue. The fourth research method overall and the third among the considered qualitative methods is represented by the Grounded Theory. I chose this method for analysis because its specific could be very appropriate for our research conditions. Because we are studying a new and extremely complex phenomenon that has never been treated in the accounting literature, we may have to build the needed theory basing ourselves on closely related literature that slightly frames our research interest and then begin gathering and analyzing the data. The main interest of the paper, the phenomenon of global securities markets mergers can be looked at from various angles, allowing us to use Grounded Theory in order to develop a new theory to explain the process. We could yield a general framework that explains the way the perceived earnings quality is varying in US and Europe depending on the new consolidated stock exchanges, the way in which the cost of capital or liquidity increases or decreases in the same circumstances and so on, following the information that emerged from the data that modify the way of collecting data and finally that shape a new theory which was not foreseeable at the beginning. The problem of this research method in our case is that we cannot set initial hypotheses and then test them, because the purpose of the grounded theory is to "discover theory from the data". The end point of grounded theory is not to make true statements about reality, but, rather, to elicit fresh understandings about patterned relationships between social actors and how these relationships and interactions actively construct reality (Glaser & Strauss, 1967). Another difficulty of this method is the fact that the researcher is not sure when he has reached the point in which the gathered and analyzed data are sufficient in order to conclude the final form of his study. In our case, the data sources are various due to the complex nature of the studied process, and we may find ourselves in such a situation in which working with huge information sets could prove overwhelming. All in all, after performing an analysis over the four research methods, Propensity Score Matching Models, Case Study, Comparative Analysis and Grounded Theory, I have identified elements that could make each of them appropriate to be used in answering the research question. Still, I believe that the most beneficial in performing the study would be a combination between Case Study and Comparative Analysis. By using both methods we will be able to test our hypotheses and in the same time acquire a deep knowledge of the organizations structure and the way that they adapted to the merging phenomenon. It is quite unusual to use qualitative research methods in financial accounting research, but in our conditions it is crucial to do so and in plus to use a combination of two methods, because the research question demands this treatment. We have to consider the way in which we could explain and discover as much of the underlying process as possible and to that purpose to use the most pertinent approach.


In performing the analysis of the four research methods I have highlighted the fact that each of them could be used to address the problematic of variation in accounting quality in the context of the international consolidated stock markets. Even so, each of the presented methods has drawbacks and disadvantages and has got to be evaluated through the perspective of the research question. From that point of view, I find to favor the combined Case Study and Comparative Analysis methodologies. Thus, the research will focus on the sample comprising of the two US and European representative companies of financial analysis, reducing the risk of wasting resources on too many target companies, risk that the Comparative Analysis approach implies and in the same time permitting to pass the boundaries of the company as a whole without sacrificing a comprehensive explanation. In order to test our hypotheses, we will identify the differences between the two companies concerning the variation in our variables of interest. Also, specific traits of the companies are not going to be left unexplored, because we will undergo an in-depth analysis appropriated by the use of the case study methodology. Even if the combination of the two research methods can prove to be difficult, such juxtapositions present undeniable advantages. One of the certain contributions of this article is the fact that combines two qualitative research methods in performing a study in financial accounting. It can encourage other researchers to tackle research questions with qualitative research methods if they are more appropriate (and not necessarily with quantitative methods just because the papers based on them are more likely to be published in accounting journals) in order to enrich the literature and provide accounting research a true holistic character.


I am considering the phenomenon of mergers between securities exchanges that yield internationally consolidated trading platforms with substantial effects on the financial statements presentation, preparation and analysis. My attention is headed towards the 2007 merger of NYSE and EuroNext, which represented the birth of the first common stock exchange of Europe and US and the sign of the size pursuing politic for the important stock exchanges worldwide. From this, I hypothesize that numerous effects on the financial statements preparation, presentation and analysis can be identified. The motivation for the assumption is given by the fact that NYSE's regulatory regime is different from any other in the world, including the one of EuroNext and thus, as a result of the merger, the perceived accounting quality of the European companies' financial statements could be perceived as inferior to the one of US companies' financial statements and even worse, in time, due to the unequal financial analysts monitoring, it could decrease in quality even more. The stated hypotheses are constructed such that to capture on one side the overall perceived difference in accounting quality (H1) and on the other the comovement of both US and European financial analysts' interests over the European companies (H2 and H3). Due to the complexity of the analyzed phenomenon and of its specificity, a robust research method needs to be employed in order to uncover all of the various elements of the perceived accounting quality. After performing an analysis of four different research methodologies, one quantitative and three qualitative I have determined the combination between the case study and the comparative analysis approaches as being the most adequate. In designing the research project I will combine the advantages of each method so that their joining to derive the best solution for the present research. One of the most important merits of this article is that it opens the way for further research concerning the recent merging phenomenon between important US and European securities markets and the formation of global stock exchanges that affect the perceived accounting quality. A possible research endeavor can be represented by performing empirical studies over the post merger changes in the magnitude of earnings management in Europe and US and also the post merger effects on the European companies' cost of capital would represent another valid future research topic. Also, a certain contribution is a methodological one, by choosing to perform the empirical study using a combination between two qualitative research methods, Case Study and Comparative Analysis. Even if capital markets mergers ensure their survival in increasingly competitive market conditions by increase in size, the effect on the accounting quality of European companies may be negative, due to the differences between the European and the U.S. regulatory systems.
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