This study examines whether the stock market returns surrounding announcements of mergers and acquisitions (M&A) are higher for acquiring firms audited by industry specialists. External auditors are uniquely positioned to provide assurance on the financial statements of their acquiring clients both before and after an acquisition. Also, an important aspect of due diligence in M&A transactions is the external auditor’s review of the accounting records, financial statements, internal controls and information systems of the target company. Using a sample of 4,283 M&A announcements between 1988 and 2011 in the United States of America, we report the results from our main regressions, controlling for all the bidder traits and deal characteristics. We examine incremental effect of audit firm specialization on cumulative abnormal returns. We also measure the effect of audit firm industry specialization in a reduced sample of 3,946 acquisitions after removing all non-Big N auditors. We use Heckman’s (1979) two-step procedure to ensure that announcement period return to the size of the audit firm is not driven by the determinants related to auditor choice. Consistent with the idea that industry specialists provide higher quality assurance and possibly superior M&A advisory services, we find that the stock market returns are higher when acquiring firms are audited by industry specialists.
All Science Journal Classification (ASJC) codes
- Business and International Management