The role of auditors in merger and acquisition completion time

• Date: 01 November 2018
• Author: Mohamad Mazboudi,Iftekhar Hasan,Salim Chahine
• Published date: 01 November 2018
• DOI: http://doi.org/10.1111/ijau.12142

ORIGINAL ARTICLE

The role of auditors in merger and acquisition completion time

Salim Chahine

1

|Iftekhar Hasan

2,3,4

|Mohamad Mazboudi

1

1

Olayan School of Business, American

University of Beirut, Beirut, Lebanon

2

Gabelli School of Business, Fordham

University, New York, NY

3

Bank of Finland, Helsinki, Finland

4

University of Sydney, Sydney, NSW,

Australia

Correspondence

Iftekhar Hasan, Gabelli School of Business,

Fordham University, 45 Columbus Avenue

(Martino Hall, 5th Floor), New York, NY

10023.

Email: ihasan@fordham.edu

JEL Classification: G34; M41; M42

Using a sample of 664 merger and acquisition (M&A) transactions and office‐level

audit data, this study investigates the role of auditors in M&A completion time. We

find that having a common auditor for both acquirer and target firms in M&A transac-

tions increases the completion time of such transactions because the exposure to

higher litigation and reputational costs outweighs the information‐access advantage

of common auditors. However, auditors' past experience in M&A transactions helps

reduce completion time and costs. These results are robust to having Big Nauditors

at both ends as well as to various acquirer, target, and deal characteristics.

KEYWORDS

Auditors, auditor experience, common auditors, completion time, mergers & acquisitions

1|INTRODUCTION

Merger and acquisition (M&A) completion time is an important subject

in recent corporate finance studies exploring the uncertainty occurring

between the dates M&A deals are announced and the dates they are

completed (e.g., Bhagwat, Dam, & Harford, 2016; Offenberg &

Pirinsky, 2015). Furthermore, the extant literature offers no definite

answer on whether faster M&A completion is better than spending

more time on due diligence (whereby the acquirer obtains and verifies

private information to determine the value of the target's assets and

liabilities). On the one hand, acquirers and targets are under mounting

pressure from stakeholders to complete deals quickly and capture deal

synergies early. On the other hand, acquirers and targets may need

more time for due diligence to evaluate thoroughly the risks and

opportunities associated with the M&A deal. In some instances, evi-

dence shows that managers of acquirers may speed up deals in order

to conceal opportunistic activities, such as inflated earnings (Louis &

Sun, 2016).

1

Thus, managers and stakeholders, including employees

and shareholders, of the acquirers and targets would be interested

to know whether auditors have any role in transaction completion

time. Within this context, the objective of this paper is to investigate

how auditors affect M&A completion time. Although there is

increased interest in understanding how auditors affect M&A out-

comes, limited research, if any, thoroughly examines the auditor's role

in M&A completion time.

Our paper is motived by two recent studies, Cai, Kim, Chool Park,

and White (2016) and Dhaliwal, Lamoreaux, Litov, and Neyland

(2016), that highlight the importance of having common auditors

(audit firms that provide audit services to a target and its acquirer prior

to an acquisition) in the due diligence process.

2

Dhaliwal et al. (2016)

argued that target auditors are more willing to disclose information

during due diligence if the auditor also works for the acquirer, because

target auditors are their coworkers. Moreover, they argue that a com-

mon auditor is more likely to become an information intermediary if

the acquirer and target hire the same auditor. Consistent with their

argument, they find that common auditors reduce transaction uncer-

tainty by facilitating the information flow between targets and

acquirers. Cai et al. (2016) also found that the presence of a common

auditor reduces uncertainty throughout the M&A process by acting as

an information intermediary. Accordingly, common auditors may offer

an advantage, and thus M&A deals with common auditors may take

less time to complete.

However, based on the insurance theory, which posits that inves-

tors expect auditors to act as guarantors against losses in litigious cir-

cumstances (Menon & Williams, 1994; Piot, 2005), common auditors

have more reputational capital at stake in M&A and higher litigation

risk because they are involved with both the acquirer and target. Fur-

thermore, given that acquirers and targets have incentives to engage

in earnings management before M&A, common auditors face higher

litigation risk (Cai et al., 2016; Louis & Sun, 2016). Also, common audi-

tors, by possessing confidential information about the acquirer and

target, may have conflicts of interest and are therefore subject to

greater scrutiny by stakeholders (Cai et al., 2016; Dhaliwal et al.,

2016). In this regard, Agrawal, Cooper, Lian, and Wang (2013) showed

that M&A deals with common advisors experience more frequent

class‐action securities lawsuits than do deals with different advisors.

Received: 11 February 2018 Revised: 16 August 2018 Accepted: 21 August 2018

DOI: 10.1111/ijau.12142

568 © 2018 John Wiley & Sons Ltd Int J Audit. 2018;22:568–582.wileyonlinelibrary.com/journal/ijau