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    The Value of Big N Target Auditors in Corporate Takeovers.
    research summary posted September 16, 2015 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor Qualifications, 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual 
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    Title:
    The Value of Big N Target Auditors in Corporate Takeovers.
    Practical Implications:

    The findings provide new evidence confirming the role of Big N auditors in corporate takeovers. In addition, the evidence suggests a positive association between deal completion and Big N target auditors. This information is critical to acquirer managers and investors, as ex ante acquirers can expect a lower deadweight loss associated with a failed M&A deal if the target firm employs a Big N auditor. Fund managers may find the discovery of the positive association between the target likelihood and engaging a Big N target auditor to be useful. Given recent evidence recommending a portfolio selection strategy based on the probability that a firm becoming a target in an M&A generates premium returns, auditor information might be utilized to screen a low cost M&A.

    Citation:

    Xie, Y., H. S. Yi, and Y. Zhang. 2013. The Value of Big N Target Auditors in Corporate Takeovers. Auditing: A Journal of Practice & Theory 32 (3): 141-169.

    Keywords:
    Big N auditors, M&A targets, mergers and acquisitions, auditor selection
    Purpose of the Study:

    While prior literature examines the value of Big N auditors in various corporate financing activities, there is only limited evidence documenting the value of Big N auditors in one of the biggest investment decisions a company ever makesmergers and acquisitions (M&As). This paper documents the value of Big N target auditors by examining whether acquirers screen target firms based on, and whether subsequent M&A deal completion depends upon, the target firm’s auditor reputation (i.e., proxied by Big N auditor).

    The authors argue that acquirers have at least two reasons to value Big N target auditors in corporate takeovers. First, an acquirer’s ex ante assessment of the viability of M&As critically hinges on the quality of the target’s firm-specific information. Acquirers are more likely to appreciate high-quality assurance provided by Big N auditors for target firms (the assurance value perspective). Second, it is not uncommon for acquirers to charge target auditors with misrepresenting the viability of the business being sold. Given this litigation risk, acquirers are likely to prefer target firms with Big N auditors due to their deep pockets. This insurance value of target auditors also likely motivates acquirers to value Big N auditors of potential target firms (the insurance value perspective).

    Design/Method/ Approach:

    The authors identify firms being targeted in M&As from the Securities Data Corporation’s (SDC) data ranging from 1987 to 2006. They retain observations for both takeover targets and non-takeover targets, and there are 96,902 firm-year observations with complete data on variables for the first test. Among them, 3,000 observations are takeover targets. Note that the sample only includes public bidder/target companies. The final sample used for the second test consists of 2,130 firm-year observations.

    Findings:
    • The likelihood of a company becoming an M&A target is higher when it engages Big N auditors.
    • Conditioning on being targeted, the likelihood of a target being eventually acquired is higher when it engages a Big N auditor.
    • To provide further evidence of the assurance and insurance values of Big N auditors in M&As, the authors examine whether the main findings are more pronounced for firms with higher information risk. The results of these cross-sectional tests reveal that the effects of Big N target auditors on the likelihood of companies becoming targets and on deal completion rates are more pronounced for firms with low accruals quality (the proxy for high information risk).
    • The results indicate that Big N target auditors facilitate M&A deals by lowering a target’s information risk and expected litigation costs.
    Category:
    Audit Team Composition, Auditor Selection and Auditor Changes
    Sub-category:
    Auditor Qualifications (e.g. size - industry expertise), Industry Expertise – Firm and Individual