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Summer 2004 CalBusiness  
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Nondorf Tracks Biz Impact of Accounting Methods

An accountant by trade, Assistant Professor Maria Nondorf researches the financial accounting of acquisitions and employee stock options.

In ongoing research, Nondorf is now examining how employee stock options were treated in 400 high-technology acquisitions between 1992 and 2002. “Even though the accounting rule-setters have been increasingly tightening accounting rules,” she says. “I'm trying to see if there are ways that companies are still attempting to circumvent them.”

In her nine years as an accountant and a senior manager in corporate finance at a major public accounting firm, Nondorf had plenty of opportunity to observe how companies stretched the rules regarding financial accounting without technically breaking the law. When she made a career switch into academia, she decided to focus her research on understanding the economic effects of structuring transactions to achieve particular accounting results.

Nondorf started by looking into investment behavior of high-technology companies that used the now-outlawed “pooling of interests” accounting method for acquisitions. Prior to 2001, companies were allowed to structure a merger so as to hide the amount they paid for an acquired firm that was over the market value of the target firm's assets. Pooling – or adjusting the numbers to make it look as though the two companies had always operated together – rendered the overpayment invisible and avoided the drag on the firm's earnings.

One catch was that companies using pooling were prohibited from repurchasing their own stock for two years prior to and following the acquisition. During these restricted periods these firms tended instead to aggressively invest in other projects. “As a result, they ended up taking on unfavorable investments, such as over-investing in research and development and taking on value-destroying acquisitions,” says Nondorf. “Firms that chose not to pool were financially better off in the long run.”

In the course of collecting data, Nondorf and several colleagues from the University of North Carolina , where she earned her Ph.D., have assembled a database of shareholder information on every publicly traded company. From this database they have learned that a company's mix of shareholders tends to shift systematically over the life of the firm. At first, firms are dominated by large blockholders and insider shareholders, then shift to institutional shareholdings, such as investment banks and pension funds after for about five years. It takes seven or eight years before individual investors become an important part of the mix. Nondorf is a CPA in the state of Georgia.

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Maria Nondorf

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