Market for Corporate Control, Auditor Selection, and Audit Fees: Evidence from International M&A Laws

• In Event: 2.02. Audit in International Contexts

Abstract

We investigate whether the market for corporate control affects auditor selection and audit pricing in a cross-country setting, and, if so, how. In so doing, we exploit the staggered enactments of M&A laws as an external shock that substantially increases takeover pressure. We find that firms are more likely to choose Big 4 auditors in the period after the enactment of M&A laws, suggesting that the takeover pressure heightened by the passage of M&A laws increases the demand for audit verification by high-quality auditors. We also show that the enactment of M&A laws improves financial reporting quality and does so to a greater extent in countries with higher auditor legal liability. We further find that improved reporting quality facilitates creditors’ and investors’ reliance on accounting information, as reflected in greater use of accounting-based debt covenants and enhanced earnings informativeness, respectively, in the post-enactment period. Finally, we find that audit fees decrease after the enactment of M&A laws, suggesting that the fee-decreasing effect of strengthened external governance is greater than the fee-increasing effect associated with the increased demand for audit verification.

Authors

• Ahrum Choi, Hong Kong Baptist University

• Jeong-Bon Kim, City University of Hong Kong

• Jay Junghun Lee, University of Massachusetts Boston

• Jong Chool Park, University of South Florida