Expert Auditors in Strategic Alliances

• In Event: Benefits of Audits

Abstract

We examine the effect of shared auditors on strategic alliances. We predict that shared auditors improve the quality of strategic alliances by reducing information asymmetry and hold-up problem common in the alliance relationships and create value for both partners in the alliances. Consistent with the prediction, we document that the announcement date abnormal returns are higher for both partner firms in alliances that share the same auditor. We also find that information asymmetry is less severe and financial information more synchronized for firms in alliances with shared auditors, and strategic alliance agreements are more likely to survive for a longer time when there is shared auditors. Moreover, we find that strategic alliances that are more likely to suffer from information asymmetry and hold-up problems benefit more from shared auditors. Our evidence further shows that, recognizing the benefit of shared auditors, everything else equal, firms are more likely to form strategic alliances when sharing the same auditors.

Authors

• Yuan Ji, The Hong Kong Polytechnic University

• Yanfeng Xue, The George Washington University