Presentation is loading. Please wait.

Presentation is loading. Please wait.

Shared Auditors in Mergers and Acquisitions Lubomir Litov University of Arizona & Wharton Financial Institutions Centre, Univ. of Pennsylvania.

Published byWinifred Jones Modified over 9 years ago

Similar presentations

Presentation on theme: "Shared Auditors in Mergers and Acquisitions Lubomir Litov University of Arizona & Wharton Financial Institutions Centre, Univ. of Pennsylvania."— Presentation transcript:

1 Shared Auditors in Mergers and Acquisitions Lubomir Litov University of Arizona & Wharton Financial Institutions Centre, Univ. of Pennsylvania

2 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

3 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”

4 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

5 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

6 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

7 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

8 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)

9 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

10 Univariate Analysis Shared vs. Non-shared Auditors About 26% of sample bids have shared auditors Non-Shared AuditorShared Auditor VariableObsMeanObsMeanDifft-stat Premium2,59746.9181042.22-4.692.55 *** Acquirer CAR2,740-0.01858-0.010.00-0.26 Target CAR2,7400.218580.19-0.022.20 *** Completed2,7400.818580.850.04-3.08 *** Value of Transaction2,7401.218581.280.07-0.65 Tender Offer2,7400.228580.18-0.042.62 *** Cash Only Deal2,7400.318580.26-0.052.82 *** Hostile2,7400.058580.04-0.011.42 Number of Bidders2,7401.158581.10-0.053.24 *** Same 2-digit SIC2,7400.598580.640.05-2.83 ***

11 Univariate Analysis Shared vs. Non-shared Auditors About 26% of sample bids have shared auditors Non-Shared AuditorShared Auditor VariableObsMeanObsMeanDifft-stat Premium2,59746.9181042.22-4.692.55 *** Acquirer CAR2,740-0.01858-0.010.00-0.26 Target CAR2,7400.218580.19-0.022.20 *** Completed2,7400.818580.850.04-3.08 *** Value of Transaction2,7401.218581.280.07-0.65 Tender Offer2,7400.228580.18-0.042.62 *** Cash Only Deal2,7400.318580.26-0.052.82 *** Hostile2,7400.058580.04-0.011.42 Number of Bidders2,7401.158581.10-0.053.24 *** Same 2-digit SIC2,7400.598580.640.05-2.83 ***

12 Univariate Analysis Shared vs. Non-shared Auditors About 26% of sample bids have shared auditors Non-Shared AuditorShared Auditor VariableObsMeanObsMeanDifft-stat Premium2,59746.9181042.22-4.692.55 *** Acquirer CAR2,740-0.01858-0.010.00-0.26 Target CAR2,7400.218580.19-0.022.20 *** Completed2,7400.818580.850.04-3.08 *** Value of Transaction2,7401.218581.280.07-0.65 Tender Offer2,7400.228580.18-0.042.62 *** Cash Only Deal2,7400.318580.26-0.052.82 *** Hostile2,7400.058580.04-0.011.42 Number of Bidders2,7401.158581.10-0.053.24 *** Same 2-digit SIC2,7400.598580.640.05-2.83 ***

13 Univariate Analysis Do shared auditors facilitate bidding? Big-N Regime (Big-N only) Random Assignment Probability Percentage of Deals with a Shared AuditorDifference 1985-1988 (Big-8)0.150.190.04 (N=19,715)(N=390) 1989-1997 (Big-6)0.170.260.09 (N=57,181)(N=1,041) 1998-2002 (Big-5)0.200.270.06 (N=39,053)(N=1,007) 2003-2010 (Big-4)0.250.330.08 (N=47,140)(N=683) Average0.07

14 The Probability of Receiving a Bid Marginal Effects of Logistic Regressions VariableAll Big N Pre-SOXPost-SOX Auditor Industry Network0.041***0.030**0.065*** (4.50)(2.55)(5.14) Auditor Network0.068***0.063**0.026* (4.50)(2.53)(1.65) Target ControlsYes Industry ControlsYes Year ControlsYes N97,561 89,729 60,67436,887 Pseudo R20.036 0.037 0.0390.035 The dependent variable equals one if a Compustat firm receives a bid

15 Shared Auditors and Deal Premiums (SDC Bid Data) Dependent Variable = Deal Premium All Deals Big N Deals Shared Auditor-4.378 ** -4.901 *** (-2.53)(-2.85) Shared Auditor Office-11.336 ** -12.040 ** (-2.26)(-2.54) Target/Acquirer/Deal Controls Yes Industry ControlsYes Year ControlsYes N3,3322,6512,9232,272 R20.1400.1350.1510.145 Adj. R20.1180.1070.1260.113

16 Shared Auditors and Target Announcement Returns (SDC Bid Data) Dependent Variable = Target CAR (-1,1) All Deals Big N Deals Shared Auditor-0.017 * -0.018 * (-1.66)(-1.75) Shared Auditor Office-0.078 *** -0.075 *** (-3.96)(-3.50) Target/Acquirer/Deal Controls Yes Industry ControlsYes Year ControlsYes N2,8782,2792,5111,943 R20.1320.1330.1430.144 Adj. R20.1070.1000.1130.106

17 Shared Auditors and Acquirer Announcement Returns (SDC Bid Data) Dependent Variable = Acquirer CAR (-1,1) All Deals Big N Deals Shared Auditor0.007 ** 0.006 * (2.06)(1.82) Shared Auditor Office0.0040.003 (0.60)(0.39) Target/Acquirer/Deal Controls Yes Industry ControlsYes Year ControlsYes N 2,9872,3572,6082,010 R2 0.0870.0910.0890.092 Adj. R20.0610.0590.0600.055

18 Shared Auditors and Bid Completion (SDC Bid Data) Dependent Variable = Deal Completion Indicator All Deals Big N Deals Shared Auditor0.042 *** 0.035 *** (3.43)(2.73) Shared Auditor Office0.101 *** 0.086 *** (6.13)(4.50) Target/Acquirer/Deal Controls Yes Industry ControlsYes Year ControlsYes N3,5982,8663,1212,428 Pseudo R20.258 0.2690.266

19 Controlling For Selection Bias Premium Target CAR Acquirer CAR Completed Shared Auditor-4.386 ** -0.0150.006 * 0.191 *** (-2.48)(-1.37)(1.89)(2.58) Shared Auditor Office-11.430 ** -0.085 *** -0.0070.477 ** (-2.57)(-3.89)(-0.89)(2.51) Inverse Mills Ratio127.835 *** 156.852 *** 0.3780.342-0.154 ** -0.123 (3.14)(3.39)(1.59)(1.28)(-2.04)(-1.52) Target/Acquirer/Deal Controls Yes Industry Controls Yes Year Controls Yes N2,8032,2142,5411,9982,6052,0383,248 R20.1460.1480.1350.1360.0940.101 Adj. R20.1200.1140.1050.0980.0650.063 Rho-.040.004 LR Test Chi2 (p-value) 0.9040.990

20 Premiums, Shared Auditors, and SOX Dependent Variable = Deal Premium All Deals Big N Deals Shared Auditor * Pre-SOX-4.216 * -4.453 ** (-1.91)(-2.08) Shared Auditor * Post-SOX-3.049-4.314 (-1.10)(-1.49) Shared Auditor Office * Pre-SOX-11.018 * -11.696 ** (-1.72)(-2.01) Shared Auditor Office * Post-SOX-9.953 * -10.195 ** (-1.84)(-2.24) Deal ControlsYes Industry ControlsYes N 3,3322,6512,9232,272 R2 0.1400.1350.1510.145 Adj. R2 0.1170.1060.1250.112

21 Completion, Shared Auditors, and SOX Dependent Variable = Indicator for Deal Completion All Deals Big N Deals Same Auditor Parent X Pre-SOX0.043 *** 0.033 ** (3.11)(2.30) Same Auditor Parent X Post-SOX0.0080.000 (0.34)(0.02) Same Auditor Local Office X Pre-SOX0.099 *** 0.086 *** (5.27)(4.13) Same Auditor Local Office X Post-SOX0.091 *** 0.052 (2.62)(0.95) Deal ControlsYes Industry ControlsYes N3,5982,8663,1212,428 Pseudo R20.2410.2420.253

Download ppt "Shared Auditors in Mergers and Acquisitions Lubomir Litov University of Arizona & Wharton Financial Institutions Centre, Univ. of Pennsylvania."

Similar presentations

Risk Management P.V. Viswanath Class Notes for EDHEC course on Mergers and Acquisitions.

Risk Management P.V. Viswanath Class Notes for EDHEC course on Mergers and Acquisitions.
Using Option Prices to Infer Overpayments and Synergies in M&A Transactions Kate Barraclough, Vanderbilt University David Robertson, Duke University Tom.

Using Option Prices to Infer Overpayments and Synergies in M&A Transactions Kate Barraclough, Vanderbilt University David Robertson, Duke University Tom.
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 1 - - - - - - - - Chapter 1 - - - - - - - - The Takeover Process.

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston Chapter The Takeover Process.
A test of the free cash flow hypothesis: The case of bidder returns Larry H.P. Lang Rene M. Stulz Ralph A. Walkling (Journal of Financial Economics 29,

A test of the free cash flow hypothesis: The case of bidder returns Larry H.P. Lang Rene M. Stulz Ralph A. Walkling (Journal of Financial Economics 29,
Chapter 29: Mergers and Acquisitions

Chapter 29: Mergers and Acquisitions
Strategic investment criteria Olivier LEVYNE (November 7 th, 2008) Global Investment Banking.

Strategic investment criteria Olivier LEVYNE (November 7 th, 2008) Global Investment Banking.
Extraordinary Acquirers

Extraordinary Acquirers
REPETITIVE CROSS-BORDER MERGERS & ACQUISITIONS Amrita Nain, Kyeong Lee, and Emma Xu 2014 LFE Workshop in Financial Economics Higher School of Economics,

REPETITIVE CROSS-BORDER MERGERS & ACQUISITIONS Amrita Nain, Kyeong Lee, and Emma Xu 2014 LFE Workshop in Financial Economics Higher School of Economics,
Bank Valuation Outline –Determining the value of the equity of a commercial bank –Using the price-earnings ratio –Bank merger and acquisition pricing –Bank.

Bank Valuation Outline –Determining the value of the equity of a commercial bank –Using the price-earnings ratio –Bank merger and acquisition pricing –Bank.
The Cost of Advice In Mergers and Acquisitions Rebel A. Cole Kenneth Ferris Arie L. Melnik Presented at the 4 th ICAF conference, Corfu Island, August.

The Cost of Advice In Mergers and Acquisitions Rebel A. Cole Kenneth Ferris Arie L. Melnik Presented at the 4 th ICAF conference, Corfu Island, August.
Does Corporate Diversification Destroy Value? John R. Graham Duke University Michael L. Lemmon University of Utah Jack Wolf University of Utah Presenter.

Does Corporate Diversification Destroy Value? John R. Graham Duke University Michael L. Lemmon University of Utah Jack Wolf University of Utah Presenter.
The Role of Equity Underwriting Relationships in Mergers and Acquisitions Hsuan-Chi Chen Anderson School of Management, University of New Mexico Keng-Yu.

The Role of Equity Underwriting Relationships in Mergers and Acquisitions Hsuan-Chi Chen Anderson School of Management, University of New Mexico Keng-Yu.
DEFINING SECOND-TIER AUDIT FIRMS IN SERBIA: IN SEARCH OF THE SMALL FOUR Nemanja Stanisic Vule Mizdrakovic Tijana Radojevic Nenad Stanic.

DEFINING SECOND-TIER AUDIT FIRMS IN SERBIA: IN SEARCH OF THE SMALL FOUR Nemanja Stanisic Vule Mizdrakovic Tijana Radojevic Nenad Stanic.
Operating Performance and Free Cash Flow of Asset Buyers Steven Freund Alexandros P. Prezas Gopala K. Vasudevan (Financial Management 32, 2003, 87-106)

Operating Performance and Free Cash Flow of Asset Buyers Steven Freund Alexandros P. Prezas Gopala K. Vasudevan (Financial Management 32, 2003, )
VALUATION OF FIRMS IN MERGERS AND ACQUISITIONS OKAN BAYRAK.

VALUATION OF FIRMS IN MERGERS AND ACQUISITIONS OKAN BAYRAK.
Whistler Conference July 2008 1 Mergers and Acquisitions: A Hormone Effect? Mo Levi, Kai Li and Feng Zhang Sauder School of Business, UBC.

Whistler Conference July Mergers and Acquisitions: A Hormone Effect? Mo Levi, Kai Li and Feng Zhang Sauder School of Business, UBC.
1 Acquisition Performance: Experience or Competence? Steven E. Phelan Tomas Mantecon University of Nevada Las Vegas.

1 Acquisition Performance: Experience or Competence? Steven E. Phelan Tomas Mantecon University of Nevada Las Vegas.
M&A STRATEGY One of most fundamental motives for M&A is growth. Companies seeking to expand are faced with a choice between internal or organic growth.

M&A STRATEGY One of most fundamental motives for M&A is growth. Companies seeking to expand are faced with a choice between internal or organic growth.
Prof. Ian Giddy New York University Mergers & Acquisitions Hostile & Competitive DBS Bank.

Prof. Ian Giddy New York University Mergers & Acquisitions Hostile & Competitive DBS Bank.
Capital Gains Taxation and the Cost of Capital: Evidence from Unanticipated Cross-Border Transfers of Tax Bases AEA 2012 Harry Huizinga (Tilburg University.

Capital Gains Taxation and the Cost of Capital: Evidence from Unanticipated Cross-Border Transfers of Tax Bases AEA 2012 Harry Huizinga (Tilburg University.

Similar presentations

Ads by Google