Small and medium sized enterprises are reasonably considered the backbone of the economy of many countries all over the world. For OECD members, the percentage of SMEs out of the total number of firms is greater than 97 percent. In the US, SMEs provide approximately 75 percent of the net jobs added to the economy and employ around 50 percent of the private workforce, representing 99.7 percent of all employers . Thanks to the simple structure of most SMEs, they can respond quickly to changing economic conditions and meet local customers’ needs, growing sometimes into large and powerful corporations or failing within a short time of the firm’s inception.
From a credit risk point of view, SMEs are different from large corporates for many reasons. For example, Dietsch and Petey (2004) analyze a set of German and French SMEs and conclude that they are riskier but have a lower asset correlation with each other than large businesses. Indeed, we hypothesize that applying a default prediction model developed on large corporate data to SMEs will result in lower prediction power and likely a poorer performance of the entire corporate portfolio than with separate models for SMEs and large corporates.
Statement of Financial Accounting Standards No. 141 (SFAS 141) requires that acquirers in a business combination recognize the fair values of identifiable assets and liabilities acquired, with any excess of the purchase price over the fair value of identifiable net assets allocated to goodwill. In addition, the standard requires the disclosure of detailed information on the individual assets and liabilities acquired in material business combinations. The FASB believes that additional information on the assets acquired and liabilities assumed in business combinations “should, among other things, provide users with a better understanding of the resources acquired and improve their ability to assess future profitability and cash flows” (FASB 2002) This study examines whether the disaggregated information provided by purchase price allocations (PPAs) is, in fact, incrementally informative to investors by analyzing stock price responses to the release of the SEC reports in which the PPAs are initially disclosed. Thus, I assess the informativeness of PPAs by measuring, through stock returns, investors’ apparent reliance on them.
I expect a significant association between abnormal returns upon the filing of the SEC reports where the PPAs are first disclosed and the amount of merger consideration if the information provided in a PPA about the individual assets and liabilities acquired causes investor to revise (either upward or downward) their assessment of the resources obtained (or, equivalently, the cash flows likely to be realized) in exchange for the consideration.
The role of limited contract enforcement in dynamic general equilibrium has been explored extensively in key papers by Eaton and Gersovitz (1981), Kehoe and Levine (1993), Kocherlakota (1996), and Kiyotaki and Moore (1997), all of which seek to explain why individual consumption, aggregate output and asset prices fluctuate more than aggregate consumption, productivity or dividends . Limited commitment has been used to investigate anomalies in asset pricing (Alvarez and Jermann (2000, 2001), Azariadis and Kaas (2007)), international business cycles (Kehoe and Perri (2002)), economic growth (Marcet and Marimon (1992)), consumption patterns and social security issues (Krueger and Perri (2005, 2006)). All these models describe environments in which a shortage of collateral rules out complete risk sharing or consumption smoothing.
One institution that improves the distribution of consumption over households is unsecured credit backed by limiting defaulters’ subsequent trading in asset markets. The literature typically assumes that an omnipotent credit authority or auctioneer excludes defaulting agents for the rest of their lives from any asset trade. Such a penalty is clearly the strongest possible punishment in the absence of collateral. It is no surprise that even the Arrow–Debreu allocation, which corresponds to perfect enforcement, can be achieved as a competitive equilibrium provided that agents are sufficiently patient or sufficiently risk averse.
