210 likes | 361 Views
Shared Auditors in Mergers and Acquisitions. Lubomir Litov University of Arizona & Wharton Financial Institutions Centre, Univ. of Pennsylvania. Research Question and Motivation. What is the role of (shared) auditors in acquisitions?
E N D
Shared Auditors in Mergers and Acquisitions Lubomir Litov University of Arizona & Wharton Financial Institutions Centre, Univ. of Pennsylvania
Research Question and Motivation • What is the role of (shared) auditors in acquisitions? • Information is extremely important in acquisitions, as acquirers value targets’ assets/liabilities • Auditors, who produce and certify information about their clients, seem particularly well-suited to provide information about targets
What We Do • We examine the impact of shared auditors on deal outcomes and the probability of receiving a bid • Auditors are privy to confidential information, management discussions, and likely have expertise about the target firm • We expect shared auditors can provide information about clients to other clients (targets and acquirers) and serve as “information intermediaries”
Can Auditors Share Client Information? • In 1989, Ernst & Whinney merged with Arthur Young • Coca-Cola was a client of E&W since the 1920’s • PepsiCo was a client of Arthur Young since 1960’s • A Coke executive disputed Pepsi’s account with the merged auditor, forcing Ernst & Young to drop PepsiCo
Hypotheses on Deal Outcomes • Primarily, we predict shared auditors provide an informational advantage to acquirers • Superior information about target • Incentives: the acquirer survives and pays fees • Consistent accounting standards/practices • In general, we expect shared auditors reduce information uncertainty and, hence, the costs of gathering information about targets • Shared auditors facilitate bids
Specific Predictions on Deal Outcomes • We expect the informational advantage increases the likelihood that an acquirer makes a bid for a target • Less fear of over-bidding • With an information advantage relative to other bidders, bidders with shared auditors have a stronger position in negotiations • Lower premiums • Higher ACARs, Lower TCARs • Higher completion rates
Previous Literature and Contribution • Advisers in M&A • Financial Advisers: McLaughlin (1992); Kale, Kini, Ryan (2003); Servaes and Zenner (1996) • Legal Advisers: Krishnan and Masulis (2013) • Auditors in M&A • Golubov et al. (2011) Louis (2005); Neimi, Ojala, and Seppala (2008); Xie, Yi, and Zhang (2010) • Focus is on Big-N vs. Non-Big-N
Previous Literature and Contribution • Shared Agents in M&A • Shared financial advisers: Agrawal et al. (2011) • Shared directors: Cai and Sevilir (2012); Stuart and Yim (2010) • Information in M&A • Form of payment and competition: Fishman (1989) • Negotiations: Povel and Singh (2006) • Contractual Provisions: Bates and Lemmon (2003)
Data • CRSP/Compustat • SDC – bids between 1985 and 2010 • Deals above $10 million • 3,598 bids • For bid data, we create an indicator, shared auditors, equal to one if target and acquirer retain the same audit firm, as recorded by Compustat • Compustat data is lagged one year
Univariate AnalysisShared vs. Non-shared Auditors • About 26% of sample bids have shared auditors
Univariate AnalysisShared vs. Non-shared Auditors • About 26% of sample bids have shared auditors
Univariate AnalysisShared vs. Non-shared Auditors • About 26% of sample bids have shared auditors
The Probability of Receiving a BidMarginal Effects of Logistic Regressions The dependent variable equals one if a Compustat firm receives a bid
Shared Auditors and Target Announcement Returns(SDC Bid Data)
Shared Auditors and Acquirer Announcement Returns(SDC Bid Data)