Specialized Auditors in Strategic Alliances

Abstract

We investigate the impact on strategic alliance value when auditors have greater knowledge and experience in auditing contractual alliances. Although common and economically significant, contractual alliances often fail due to uncertainty, lack of trust, and poor culture matches between alliance partners. We hypothesize that auditors with more extensive alliance expertise can help partner firms reduce information uncertainty and hold-up problems endemic in alliance relationships, resulting in higher quality alliances. Our measures of auditor expertise capture three aspects of auditor knowledge, including general alliance, alliance type (e.g. technology alliances), and deal-specific (both alliance partners share the same auditor) expertise. Primary findings document that announcement date abnormal returns are higher among alliance partners served by an alliance expert auditor, after controlling for Big N and auditor industry expertise. Effects are more pronounced among alliance partners where uncertainty and trust are more problematic – when bankruptcy risk is greater, boards are not independent, managers are more entrenched, and corporate culture environments are of poor quality. Overall, our evidence suggests that auditors with alliance expertise help firms increase value in strategic alliance arrangements.