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

• Published in: Review of accounting studies 2024-09, Vol.29 (3), p.2753-2797
• Main Authors: Choi, Ahrum, Kim, Jeong-Bon, Lee, Jay Junghun, Park, Jong Chool
• Format: Article
• Language: English
• Subjects: Accounting firms; Accounting/Auditing; Acquisitions & mergers; Auditors; Business and Management; Corporate Finance; Internal auditing control; International law; Public Finance
• ISSN: 1380-6653; 1573-7136
• DOI: 10.1007/s11142-023-09756-x

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.