The Impact in Economics of the Faculty's Analyses of Company Accounts
The nature of such work and its prominence in British empirical research at the time are well illustrated by the UK Government’s 1978 Green Paper on Monopolies and Mergers Policy (Hattersley 1978), which led to changes in UK policy and law on industrial organisation. A remarkably large proportion of the evidence base for this Paper came from accounting studies in the Cambridge Faculty. The Hattersley Review drew upon Whittington’s (1971) analyses—using the Cambridge databank of companies’ financial accounts—of the relationship between company size and profitability: above a modest threshold level, there was little evidence of the positive relationship which might have been expected from increased market power and economies of scale. The same data archive was the basis for evidence cited from Meeks and Whittington (1975) on executive pay—the financial incentives for executives to merge even where this did not enhance performance. Again that same Cambridge data source played a central role in the findings reported in the Review from Singh (1971) on disciplinary takeover. He addressed the proposition in the theoretical work of Marris that the prospect of hostile takeover would deter executives from pursuing managerial objectives, such as growth maximisation or satisficing, at the expense of profitability and share price. Singh’s evidence did not provide much support for that proposition. Still more analysis based on the Cambridge accounting databank was cited in the form of Meeks’s (1977) study of changes in the profitability of merging firms. This failed to find compelling evidence that financial performance improved after the typical merger.[1] The Review also drew on Pratten’s monumental (1971) study of economies of scale, which analysed evidence he had painstakingly elicited from cost accountants to quantify for each industry minimum efficient scale and the extent of increasing returns to scale.
This stream of research, analysing financial statements to answer questions in industrial organisation and corporate governance, was subsequently developed at Cambridge chiefly by Alan Hughes, Andy Cosh, and their collaborators. Examples from a large body of publications include Dunne and Hughes (1994), which confounded a widespread view that industrial concentration was rising inexorably with results that smaller companies were actually growing faster than larger ones; Cosh et al. (1980) and Kumar (1984) which extended the scope of merger studies using accounts, with international comparisons and innovative approaches to measurement; and influential papers on the relation between owners and managers, including Cosh (1975), investigating the impact of growth and profitability on directors’ pay, and Cosh et al. (1989), analysing the role of institutional investors in the market for corporate control. These themes developed into a division of the new Centre for Business Research (CBR) at Cambridge, directed by Hughes, which, although housed in the Business School, welcomed disciplines from across the University, including economics, engineering, and law. This diversification into cognate disciplines coincided with a period in which the Faculty was withdrawing from sister fields such as accounting, development studies, finance, politics, and sociology. It was warmly welcomed and funded by the ESRC, which praised the CBR’s ‘first class programme of interdisciplinary research’, especially ‘first class contributions to the analysis of corporate governance and the growth and performance of small and medium sized enterprises’.[2]
- [1] Although based on UK data, such studies, and subsequent ones by Cosh, Hughes, and their colleagues(discussed below), influenced the US literature. For example, there were many citations of these authorsin the standard industrial organisation text of Scherer and Ross (1990), as well as references in the standard US text on financial statement analysis (Foster 1986).
- [2] From the (unpublished) report of the ESRC Evaluation Panel.
