shared auditors in mergers and acquisitions.docx
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Sharedauditorsinmergersandacquisitions
Sharedauditorsinmergersandacquisitions$DanS.Dhaliwala,b,n,PhillipT.Lamoreauxc,LubomirP.Litovd,JordanB.Neylande,faUniversityofArizona,UnitedStatesbKoreaUniversityBusinessSchool,KoreacArizonaStateUniversity,UnitedStatesdUniversityofOklahoma,UnitedStateseUniversityofMelbourne,AustraliafFinancialResearchNetwork(FIRN),AustralianrticleinfoArticlehistory:
Received19April2013Receivedinrevisedform22January2015Accepted26January2015JELclassifications:
G34M41M49Keywords:
AuditorsSharedauditorsMergersandacquisitionslnformationasymmetryabstractWeexaminetheimpactofsharedauditors,definedasauditfirmsthatprovideauditservicestoatargetanditsacquirerfirmpriortoanacquisition,ontransactionoutcomes.Wefindsharedauditorsareobservedinnearlyaquarterofallpublicacquisitionsandtargetsaremorelikelytoreceiveabidfromafirmthathasthesameauditor.Moreover,thesesharedauditordealsareassociatedwithsignificantlylowerdealpremiums,lowertargeteventreturns,higherbiddereventreturns,andhigherdealcompletionrates.Theseresultsaredrivenbybidsinwhichtargetsandacquirerssharethesamepracticeofficeofanauditfirmandinwhichthetargetissmall.Overall,ourevidencesuggeststhatbiddersbenefitfromsharinganauditorwiththetarget.Ourresultsarerobusttocontrolsforalternativeexplanationsandforselectionbiasintheshared-auditoreffect.&2015ElsevierB.V.Allrightsreserved.1.IntroductionWeexamineacquisitionoutcomeswhenthesameauditorauditsthefinancialstatementsofbothabidderandatargetfirmpriortoanacquisition.Wehypothesizethatsharedauditorsfacilitatetheflowofinformationbetweenbiddersandtargets,andthatthebenefitsofsuchmitigatedinformationasymmetryaccrueprimarilytotheacquiringfirm.Externalauditorshaveuniqueaccesstoseniorexecutives,participateinauditcommitteemeetings,andhaveaccesstoboardmeetingminutesandgeneralinformationaboutafirmintheconductoftheiraudits.Thisaccesstoseniorexecutivescombinedwithinformationgatheredduringanauditprovidesauditorswithanopportunitytodiscussstrategicinitiativeswiththeirclientsincluding,amongothers,theacquisitionordispositionofassets.Communicationaboutsuchinitiativesmaybeintheformof"softtalk".Becauseauditorscontractwithavarietyofcompanies,auditorshavethepotentialtoContentslistsavailableatScienceDirectjournalhomepage:
www.elsevier.com/locate/jaejournalofAccountingandEconomicshttp:
//dx.doi.org/10.1016/j.jacceco.2015.01.0050165-4101/&2015ElsevierB.V.Allrightsreserved.thankAnupAgrawal,GennaroBernile,RobertBruner,MattEge,D.J.Fairhurst,KathleenKahle,HaydenKane,SandyKlasa,ChrisLamoureux,HennockLouis,?
yvindNorli,MattSerfling,RichardSias,JaredStanfield,MarkTrombley,andworkshopparticipantsattheUniversityofMelbourneforhelpfulthoughtsandcomments.WeareespeciallythankfultoJohnCore(theEditor)andMarkDeFond(theReviewer)fortheirinsightfulcommentsthathelpedusgreatlyimprovethepaper.Lastly,wethankMikeMowchanforhisresearchassistance,andourrespectiveuniversitiesforresearchfunding.nCorrespondingauthor.Tel.:
tl5206212146.E-mailaddresses:
dhaliwal@email.arizona.edu(D.S.Dhaliwal),Phillip.Lamoreaux@asu.edu(P.T.Lamoreaux),
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lubomir.p.litov-l@ou.edu(L.P.Litov),jordan.neyland@unimelb.edu.au(J.B.Neyland).JournalofAccountingandEconomics](]]]])]]]-]]]Pleasecitethisarticleas:
Dhaliwal,D.S.,etal.,Sharedauditorsinmergersandacquisitions.JournalofAccountingandEconomics(2015),http:
//dx.doi.org/10.1016/j.jacceco.2015.01.005i
becomeinformationintermediariesbetweenprospectivetargetsandacquirers,whetherintentionalorotherwise.Assharedauditorsareincentivizedtoalignwiththeinterestsoflargerclients,weanticipateapotentialbiasinfavorofacquisitiveclientsovertargetclients.Hence,biddersthatshareanauditfirmwithapotentialtargetcouldhaveaninformationadvantagerelativetoothersintheprocessofbidding,andweanticipatethatthisadvantagewillmanifestitselfinanincreasedlikelihoodofsubmittingabidforatarget.Theimpactofsharedauditorslikelyextendsbeyondthepointofbiddingandtargetselection.Ifshared-auditorbiddershaveaninformationaladvantagerelativetocompetingbidders,bidderswithsharedauditorscanleveragethisadvantageintoabetterbargainingpositionwiththetarget.Asotherbiddershavelessinformation,theyhavelessincentivetobid,thusreducingbidcompetition.Withlowerbidcompetition,anacquirerwithasharedauditorhastheopportunitytonegotiateamorefavorablepriceforthetargetfirm,thusreducingpremiumspaid.Theopportunityforasharedauditortobecomeaninformationintermediaryislikelyincreasedifanacquirerandtargetcontractwiththesameauditoroffice.Thisisduetoahigherlikelihoodofoverlapofauditpersonnelonclientengagementteamsandincreasedinformalcontactbetweenauditteamsofthetargetandacquirer,i.e.,uwatercooler”talkamongauditorsinthesamepracticeoffice.Therefore,weexpectthesharedauditoreffectondealoutcomestobemorepronouncedifthebidderandacquirercontractwiththesameauditorpracticeoffice.Weanticipatethatsharedauditorsmayfavoracquisitiveclientsovertargetsforatleasttworeasons.First,anauditor'slong-termincentives(evenwithinanauditor'spracticeoffice)aremorecloselyalignedwiththoseoftheiracquisitiveclients.Ourintuitionfollowsthatappliedtosharedinvestmentbankadvisorswhoaremorelikelytofavoracquiringfirmswhenrepresentingbothatargetandanacquirerinthesamedeal(Agrawaletal.,2013).Asauditfirmsandtheirpracticeofficeshaveanincentivetofosterandmaintainongoingrelationshipswithlarger,moreacquisitiveclients,weanticipatesharedinformationattheauditorofficelevelwillbenefitacquirersmoresothantargets.Second,withasharedauditor,targetauditorsmaybemoreforthcomingintheduediligenceprocess,astargetauditorsmaybemorewillingtodiscloseinformationtoco-workersratherthanauditorsfromanotherauditfirm,especiallywhentheinformationisconcentratedwithinanauditor'spractice.Wehenceanticipatethatbiddersthatshareauditorofficeswiththeirtargetswillgainsuperioracquisition~re1atedinformationabouttheirtargetsandexperiencelowerbidcompetitionforthosetargets.Botheffectswouldyieldfavorabletransactionoutcomesforacquirers.Assharingconfidentialinformationabouttargetclientswithacquirerclientsappearstobeaviolationofconflictofinterestrules,weexpectthathigher(lower)qualityauditorswouldbeless(more)likelytoactasinformationintermediariesinmergerandacquisitiondeals.Further,astheSarbanes-OxleyActof2002(SOX)strengthenedauditorindependencerulesandincreasedawarenessofauditorindependenceconcerns,weexpecttheshared-auditoreffectonM&AdealstobestrongerpriortoSOX.Usingdataonpublictransactionsfrom1985to2010,weexaminetheimpactofsharedauditorsontheoutcomesofallacquisitionsandthesubsetofacquisitionsbetween
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