Common auditors in M&A transactions

Abstract

We examine merger and acquisition (M&A) transactions in which the acquirer and the target share a common auditor. We predict that a common auditor can help merging firms reduce uncertainty throughout the acquisition process, which allows managers to more efficiently allocate their capital, resulting in higher quality M&As. Consistent with our prediction, we find that deals with common auditors have higher acquisition announcement returns than do non-common-auditor deals. Further, we find that the common-auditor effect is more pronounced for deals with greater pre-acquisition uncertainty and deals involving acquirers and targets that are audited by the same local office of the common auditor. We also find that there is an increased probability of an M&A for firms with a common auditor. Collectively, our evidence suggests that common auditors act as information intermediaries for merging firms, resulting in higher quality acquisitions. Highlights• We examine merger and acquisition (M&A) transactions in which the acquirer and the target share a common auditor. • A common auditor helps merging firms reduce uncertainty, resulting in higher quality M&As. • Deals with common auditors have higher acquisition announcement returns than do non-common-auditor deals. • The common-auditor effect is more pronounced for deals with greater preacquisition uncertainty. • The common-auditor effect is more pronounced for deals involving the same local office of the common auditor. JEL Classification G34; M41; M49We thank Michelle Hanlon (the editor), an anonymous referee,

Common auditors and cross-country M&A transactions

“…Collectively these results point to the common auditor effect documented in Cai et al (2016) holding also in cross-country M&A transactions, where even though the need for information intermediaries is higher, there is less opportunity for information transfer. In interpreting these results caution should be exercised in that the quantity of information exchanged between auditors is unobservable and thus we cannot directly speak to the type, amount, and the transfer mechanics of such information.…”

“…Moreover, they find that shared auditors "are associated with significantly lower deal premiums, lower target event returns, higher event returns and higher deal completion rates". In a similar vein, Cai et al (2016) find that shared auditors act as information intermediaries and give rise to higher quality M&A transactions. We add to this within-country literature by showing that common auditors also play an economically significant role in cross-country audits, when significant barriers to the transfer of both tacit and codified information between target and acquirer auditors exist.…”

“…We do this by referring to the suggestion in the existing literature that common auditors to the target and acquirer firms can reduce uncertainty and mitigate the negative effects of information asymmetry in within-country M&A transactions (Cai at al., 2016). Whether common auditors are important in cross-country M&A transactions has, to our knowledge, never been studied.…”

“…Due to differing cultural norms and potential language barriers, even when the parties to the transaction are audited by similarly qualified auditors, it is likely that such audit firms operate independently of each other due to differing accounting standards, thus not only effectively sharing limited amounts of information but potentially increasing the already significant information asymmetry. It is therefore an empirical question if when the parties to the transaction are audited by a common audit network, which hereof we refer to as common auditors, the common auditor effect documented by Cai et al (2016) for within-country M&A transactions still applies.…”

“…Asquith et al, 1983;Bradley et al, 1988;Cai and Sevilir, 2012;Agrawal et al, 2013;Goodman et al, 2014;Cai et al, 2016) we use acquisition announcement returns as our main measure of M&A quality and expect common auditors to be associated with higher acquisition announcement returns. Subsequently, we test whether other proxies used in prior literature to capture M&A quality, give us similar results.…”