Market for corporate control and demand for auditing: evidence from international M&A laws

Ahrum Choi (), Jeong-Bon Kim (), Jay Junghun Lee () and Jong Chool Park ()
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Ahrum Choi: Sungkyunkwan University
Jeong-Bon Kim: City University of Hong Kong
Jay Junghun Lee: University of Massachusetts Boston
Jong Chool Park: University of South Florida

Review of Accounting Studies, 2024, vol. 29, issue 3, No 20, 2753-2797

Abstract: Abstract We investigate whether and how the market for corporate control affects the demand for audit service in a cross-country setting. In so doing, we exploit the staggered enactments of merger and acquisition (M&A) laws as an exogenous 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 and assurance by high-quality auditors. We also find that the enactment of M&A laws leads to greater demand for Big 4 auditors through two channels: managerial commitment to curtailing agency problems and the enhancement of board monitoring. We further show that improved auditor 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. Overall our results suggest that auditors play a key role in strengthening corporate governance after the enactment of M&A laws.

Keywords: Auditor selection; International merger and acquisition (M&A) laws; Managerial commitment; Board monitoring; Debt covenants; Earnings informativeness (search for similar items in EconPapers)
JEL-codes: G34 G38 M41 M42 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11142-023-09756-x

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