The Impact of the Market for Corporate Control on Audit Fees: Evidence from International M&A Laws.

• In Event: International Issues

Abstract

This paper investigates whether and how external governance from the takeover market affects audit fees. We exploit the staggered enactments of international M&A laws as an exogenous shock that increases takeover pressure substantially. We hypothesize and find that audit fees decrease significantly after the passage of M&A laws. This is because the external governance strengthened by the takeover law enactments reduces the ex-ante agency risk perceived by auditors and shareholders, which in turn decreases clients’ misstatement risk and auditor litigation risk and thus reduces audit fee. We find that the disciplinary effect of M&A laws is more pronounced in countries with stronger investor protection and in clients with better information environments. We further find that the inverse relation between the takeover law enactments and audit fees is concentrated in clients with high agency costs. These findings help us better understand the interactive role of the market for corporate control and external auditing in shaping the corporate governance mosaic.

Authors

• Ahrum Choi, Hong Kong Baptist University

• Jeong-Bon Kim, University of Waterloo

• Jay Junghun Lee, University of Massachusetts Boston

• Jong Chool Park, Old Dominion University