Common auditors in M&A transactions

Abstract

We examine merger and acquisition (M&A) transactions in which the acquirer and the target share a common auditor. We predict that a common auditor can help merging firms reduce uncertainty throughout the acquisition process, which allows managers to more efficiently allocate their capital, resulting in higher quality M&As. Consistent with our prediction, we find that deals with common auditors have higher acquisition announcement returns than do non-common-auditor deals. Further, we find that the common-auditor effect is more pronounced for deals with greater pre-acquisition uncertainty and deals involving acquirers and targets that are audited by the same local office of the common auditor. We also find that there is an increased probability of an M&A for firms with a common auditor. Collectively, our evidence suggests that common auditors act as information intermediaries for merging firms, resulting in higher quality acquisitions.