Profits, Labor Share and the Rise of Acquired Intangibles

• Department of Economics

In this Departmental Seminar, Prof. Raul Santaeulalia-Llopis (NYU Abu Dhabi) will present the paper 'Profits, Labor Share and the Rise of Acquired Intangibles.'

We study how incorporated firms strategically chose to recognize (or not) acquired intangibles from mergers and acquisitions (M&As) in their business accounts and its impli­cations for the measurement of economic profits and labour share. Our analysis is informed by a business accounting change in the early 2000s that forced the acquirer firms to report the acquired intangibles from M&As. Before the accounting change, acquirer firms that had the incentive to frontload ac­counting profits-e.g., through CEO compensation affected by these profits-preferred to record the M&A with an accounting method (pooling) that did not recognize the ac­quired intangibles. This left acquired intangibles out of both the balance sheet and income statement, which raises not only accounting profits (as the acquired intangibles are not amortized in the income statement) but also potentially economic profits that use, at face value, only assets recognized in the balance sheet. Further, by implementing accounting obstacles to pooling, target firms leveraged the acquiror's incentive to frontload profits in order to raise the price of the acquisition, extract­ing a larger share of the total surplus and, hence, reflecting more accurately the marginal benefit of the acquisition. After the accounting change, this leverage ceases to exist, in­ creasing the proportion of the surplus captured by the acquirers as the price paid for the acquisition lowers relative to marginal benefit of the acquisition. Correcting for the omitted acquired intangibles at the firm level before and after the accounting change, we find measures of economic profits and labour share that are relatively trendless.

Co-authors: Jacob T. Hess, Luis E. Rojas, Carolina Villegas-Sanchez