Shared Auditors in Mergers and Acquisitions

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 AnalysisShared vs. Non-shared Auditors • About 26% of sample bids have shared auditors

11. Univariate AnalysisShared vs. Non-shared Auditors • About 26% of sample bids have shared auditors

12. Univariate AnalysisShared vs. Non-shared Auditors • About 26% of sample bids have shared auditors

13. Univariate AnalysisDo shared auditors facilitate bidding?

14. The Probability of Receiving a BidMarginal Effects of Logistic Regressions The dependent variable equals one if a Compustat firm receives a bid

15. Shared Auditors and Deal Premiums(SDC Bid Data)

16. Shared Auditors and Target Announcement Returns(SDC Bid Data)

17. Shared Auditors and Acquirer Announcement Returns(SDC Bid Data)

18. Shared Auditors and Bid Completion(SDC Bid Data)

19. Controlling For Selection Bias

20. Premiums, Shared Auditors, and SOX

21. Completion, Shared Auditors, and SOX