How Accounting Firms Compete for Financial Advisory Roles
in the M&A Market
Pawel Bilinski, Cass Business School, City University London†
Andrew Yim, Cass Business School, City University London‡
25 November 2015
Abstract. Thomson Reuter’s quarterly rankings consistently place accounting firms among
top ten financial advisors on mergers and acquisitions (M&A) in the mid- and low-end of the
market. We propose that accounting firms lever their audit expertise to produce fairer target
valuations, particularly in industries where the auditor specializes, and when the target has low
reporting quality. These competitive strengths of accounting firms translate into tangible gains for
bidders as transactions advised by accounting firms have (1) higher announcement day price
reactions compared to deals with investment-bank financial advisors, (2) a lower likelihood the
acquirer overpays for the target, and (3) a lower likelihood the deal will not complete. These
acquirer benefits translate into more repeat business for accounting firms as they are more likely
to advise on subsequent transactions. (JEL G34, M41, M49)
Key words: accounting firms, industry expertise, financial advisory, mergers and acquisitions,
unlisted targets
†
Corresponding author. Address: Faculty of Finance, Cass Business School, City University London, 106 Bunhill
Row, London EC1Y 8TZ, UK. E-mail: [email protected]. ‡ E-mail: [email protected].
We thank Alexander Ljungqvist and Paolo Volpin and participants of the CeFARR M&A roundtable for their
useful feedback. All remaining errors are ours.
1
1. Introduction
Accounting firms, besides audit, provide a variety of non-audit services including financial
advisory services for mergers and acquisitions (M&As). In recent years, accounting firms have
been repeatedly ranked among the top ten M&A financial advisors by Thomson Reuter’s quarterly
rankings for the mid- and low-end market.1 Yet, it is unclear what competitive strengths allow
accounting firms to compete with established investment banks for the M&A advisory role and
what incremental benefits they offer to their clients. We propose that accounting firms lever their
audit expertise to produce fairer target valuations, particularly in industries where the auditor
specializes, and when the target has low reporting quality. These competitive strengths translate
into tangible gains for bidders, such as lower offer premium, higher price reactions to deal
announcements, and lower risk the deal will not complete, and a repeat M&A business for
accounting firms.2 Valuation fairness is strengthened by the lack of pressure to cross-sell financing
for the transaction, which generates bulk of profits for bulge bracket investment banks.3 These
distinct benefits of accounting firms merger advice explain their active role in the global M&A
market.
To address the research question, we collect a sample of global M&A transactions involving
a public bidder domiciled in the US, Canada or one of 15 European markets. Over the period 1990–
2014, accounting firms advised on 1,582 transactions or around 7.6% of all the deals in the sample.
To put these numbers into context, accounting firms competed with 190 active advisors in the
1
Thomson Reuters Worldwide Rankings for the first quarter of 2015 are presented in Appendix A.
2
The Economist highlights that overpaying for the target is the second most common reason for a deal collapse
after regulatory disapproval. On average 10–20% of proposed M&A deals fail leading to significant costs related to
managerial time and credibility of the bidder that often lead to forced departures for the acquirer’s managers (The
Economist 2014).
3
Saunders and Srinivasan (2001) document that revenues from underwriting public security issues to finance
M&A transactions are on average 55% higher than merger advisory fees for bulge bracket investment banks.
2
market over the period and top bulge bracket investment banks Goldman Sachs and J.P. Morgan
advised on 4.7% and 4.5% of all the deals, respectively. For the transactions advised by accounting
firms, over 85% were advised by the largest four accounting firms (Big 4) with KPMG being the
most active accounting firm advising 2.3% of all the transactions.
We document significant differences in accounting firms M&A advisory activity over time:
less than 1% of the deals were advised by accounting firms over the period 1990–1992, with the
proportion increasing to 9% in 2001, then standing at an average of 8% for the remaining period
(i.e., around 65 deals per year). The European volume of transactions for accounting firms is
similar to that in the combined market of the US and Canada. But as a proportion of all M&A
transactions, accounting firms are more active in Europe (18% of the European deals were advised
by accounting firms vs. only 2% of the North American deals). These results point to substantial
heterogeneity in accounting firms activity in the M&A market over time and across countries,
which we investigate in detail in the study.
The first part of the study examines whether accounting firms’ competitive advantages, i.e.
their expertise to produce fairer target valuations, explain why bidders choose them as M&A
advisors. We classify a deal as advised by an accounting firm if the accounting firm is the sole
advisor or part of the advisory team. 4 We document that acquirers are more likely to choose
accounting firms as advisors when the likelihood of overpaying for the target is high. These include
deals where the target is in an industry characterized by low accounting accruals quality, for
smaller targets, when the target is a private firm, is located outside the US, and for cross-country
deals. Further, accounting firms are more likely to advise on deals where the target’s country
4
We repeat the analysis for deals with an accounting firm as the only advisor. All the conclusions remain
unchanged.
3
aggregate earnings management score from Leuz, Nanda, and Wysocki (2003) is higher than that
of the acquirer home country.5 Accounting firms should be better placed to value these transactions
considering their expertise in evaluating financial statements and better understanding of unlisted
entities’ operations in general. The latter comes from the privilege of accessing undisclosed
information of many unlisted entities through their auditor role. The economic importance of
valuation difficulty in predicting the advisor choice is high. For example, an accounting firm has
36% higher odds to advise on a deal where the target is in a low accruals quality industry. These
results confirm that resolving valuation uncertainties is an important consideration of the bidders
when selecting accounting firms as advisors.
In the second part of the study, we examine if the advantages accounting firms offer translate
into better deal outcomes for the bidders. We first examine investor reactions to deal
announcements and document more positive price reactions for deals advised by accounting firms.
The economic magnitude of this effect is significant: deals advised by accounting firms have close
to two times higher price reactions compared to deals advised by investment banks (2.03% vs.
0.68%). This translates into a $148 million shareholder value gain for a mean-sized bidder. Price
reactions are higher for deals where accounting firms have competitive advantages, such as deals
where the target is in an industry with low accruals quality and the accounting firm is an auditspecialist for this industry. To address endogeneity inherent in advisor choice, we perform two
tests. First, we repeat the analysis using propensity score matching (PSM) and find similar
conclusions. Second, we take advantage of a quasi-natural experiment and repeat the analysis in
the period after the introduction of the Sarbanes-Oxley Act (SOX) of 2002. Because the regulation
5
Leuz, Nanda, and Wysocki (2003) develop an aggregate earnings management score based on four measures:
earnings smoothing, correlation between changes in accounting accruals and changes in operating cash flows, the
magnitudes of accruals, and small loss avoidance.
4
excluded some auditors from advisory roles, our conclusions from this period should be less
subject to endogeneity concerns. The results for the post-SOX period are qualitatively similar to
the main results, corroborating our conclusion that, on average, investors perceive deals advised
by accounting firms as more value-increasing than deals advised by investment banks.
In subsequent tests, we confirm that accounting firms’ competitive strengths lie in the
valuation area. We document that the offer premium for M&As advised by accounting firms is on
average 24.7% smaller than that for deals advised by investment banks. This translates into an
average saving of $135 million for a mean-sized deal. The valuation benefit from hiring accounting
firm as advisors is particularly strong when the target is in low accruals quality industry. The result
that bidders are less likely to overpay for the target confirms that accounting firms help resolve
valuation uncertainties, particularly when the target’s accounting information is of low quality.
Further, we examine and find consistent evidence that deals advised by accounting firms are less
likely to fail. Bates and Lemmon (2003) report that 21% of M&A transactions fail, and that failed
deals lead to reputational costs for the managerial team such as forced bidder firm CEO departure
(Lehn and Zhao 2006) and negative market returns (Davidson, Dutia, and Cheng 1989). We show
that accounting firms help mitigate such costs.
Benefits from the advisory role of accounting firms should lead to reputational effects and
repeat business. Consistent with this proposition, we document that the odds a bidder will choose
an accounting firm as an advisor are 1.7 times higher when the firm advised on a previous M&A.
This result confirms that acquirers recognize the benefits from accounting firms’ advisory roles
and reward them with repeat future business.
This paper makes three major contributions. To our knowledge, we are first to document the
growing visibility of accounting firms in the global M&A financial advisory market. Thus, our
5
paper extends the literature on financial advisors in M&A transactions, which, to date, has focused
solely on the roles played by investment banks (McLaughlin 1990, 1992; Servaes and Zenner
1996; Rau 2000; Kale, Kini, and Ryan Jr. 2003; Allen et al. 2004, Golubov, Petmezas, and Travlos
2012). The emergence of accounting firms as deal advisors and their consistent placement in top
Thomson Reuter’s quarterly rankings for the mid- and low-end market has evaded the accounting
and finance literature. This is partly due to the US focus of the literature. We show that regulatory
constraints in the US have limited accounting firms’ activity in that market.6 In addition to the US
focus, seminal M&A papers use sample periods that end in early 1990s (see Schulz 2007,
DeYoung, Evanoff, and Molyneux 2009, and Faulkner, Teerikangas, and Joseph 2012 for the
review of the M&A literature). We show that early 1990s had very few M&As advised by
accounting firms. Even more recent studies, such as Kisgen, Qian, and Song (2009), who examine
fairness of opinion advisors in the US, do not identify any accounting firms.
Importantly, our study identifies how accounting firms compete with established investment
banks for advisory roles. Evidence in the literature suggests that on average acquiring firm
shareholders do not seem to benefit from acquisitions (Fuller, Netter, and Stegemoller 2002,
Moeller, Schlingemann, and Stulz 2003, McNamara, Haleblain, and Dykes 2008). This
observation often captures newspaper headlines and raises concerns about the high fees charged
by investment banks. For example, Businessweek: “Mergers: Why Most Bid Deals Don’t Pay
Off” (Henry and Jespersen 2002); Fortune: “Merger fees that bend the mind” (Petre 1986); The
Telegraph: “Investors seek Government help to reduce advisers' bank charges” (Armitstead 2011).
According to Mauboussin (2010), “[o]ne important reason that so many M&A deals fail to create
6
The introduction of SOX limited some auditors from playing the advisory roles concurrently. We document that
following the regulation, the likelihood of an accounting firm advising on an M&A transaction is drastically reduced.
This explains the lower activity of accounting firms in the US market. Specifically, the odds of an accounting advising
on an M&A transaction are 45% lower after the SOX regulation.
6
value for buyers is that acquirers tend to overpay for targets.” We show that accounting firm
advisors are more preferred by acquirers for targets with higher target valuation uncertainties,
particularly for targets with low accounting quality where bidders are more likely to overpay
(McNichols and Stubben 2015; Raman, Shivakumar, and Tamayo 2013; Marquardt and Zur 2015).
Our evidence is consistent with the perspective that accounting advisors help resolve target
valuation uncertainty.
Finally, our finding on the active role of accounting firms in the M&A market enhances the
literature on non-audit services of accounting firms. Advisory revenue is the fastest growing
revenue segment for accounting firms. We provide evidence showing how accounting firms
compete and gain foothold in the M&A market.7 We also highlight how the SOX regulation curbed
the activity of accounting firms in the US, limiting the competition in the M&A market there.
2. M&A Financial Advisory Market: Prior Literature
Various measures have been used in the M&A literature to examine the outcomes to acquirers.
They include the acquirer’s announcement-period stock returns (e.g., Faccio, McConnell, and
Stolin 2006), the offer premium paid by the acquirer (e.g., Alexandridis et al. 2013), and the deal
completion ratio (e.g., Mooney and Sibilkov 2012). Prior studies find that acquirers of listed targets
earn, on average, a negative or zero abnormal announcement-period return, and their post-merger
7
PwC UK reported that advisory revenue was the fastest growing revenue segment (16%) contributing £571m
compared to assurance (which includes audit) growing at 9% and contributing £1.1b (Agnew 2015b). Businessbecause
highlights that Big4 audit firms are aggressively expanding their finance wings as growth in audit and tax stagnates
away from audit roots (Murray 2015). This drive is supported by hiring several senior investment bankers as partners,
e.g. EY hired Blaise Girard, Bank of America Merrill Lynch’s head of retail investment banking in Europe.
7
stock performance is poor (Faccio, McConnell, and Stolin 2006 and Loughran and Vijh 1997). 8
Overpaying for targets is believed to be an important reason for so many M&A deals failing to
create value for buyers (Mauboussin 2010). Successful M&As require enormous investment of
managerial time in evaluating targets and negotiating deals. This becomes a loss in case of
uncompleted deals. Between 1979–2007, over 13% of the M&As are uncompleted. The expertise
of M&A financial advisors contributes to the successful completion of deals (Mooney and Sibilkov
2012).
The market for M&A financial advisors is dominated by investment banks playing advisory
roles (the certification hypothesis) and organizing financing for deals (Bowers and Miller 1990;
Puri 1996; Ang and Richardson 1994; DePamphilis 2010). Prior research, however, has difficulty
finding empirical evidence on the benefits of hiring investment banks as M&A advisors. For
example, Servaes and Zenner (1996) compare acquisitions conducted with and without the help of
investment banks and find that neither the use of an advisor in general nor the use of a top-tier
advisor affects announcement day returns. Porrini (2006) finds that firms that did not use
investment banks paid lower offer premia. Rau (2000) documents no association between the
quality of investment bank and acquirer announcement returns. In line with these, McLaughlin
(1992), Hunter and Jagtiani (2003) and Ismail (2010) report higher premia paid and lower
announcement day returns for bidders using tier-one investment bank advisors, as opposed to the
tier-two. For acquirers advised by tier-one advisors, the loss in the market value on the
announcement day is more than $42 billion (Ismail 2010). Allen et al. (2004) find no evidence of
the certification role of commercial banks, or similar M&A outcomes, for bidders advised by
8
The evidence on underperformance after M&As has been challenged by Bessembinder and Zhang (2013), Chang
(2012) and Mortal and Schill (2013) which attribute previous evidence to misspecification of the normal returns
benchmark.
8
commercial and investment banks. They attribute the findings to commercial banks suffering from
similar conflicts of interest as bulge bracket investment banks. For example, the advice of
commercial banks is likely to be affected by the loan financing they provide for the M&A
transaction. Recently, Golubov, Petmezas, and Travlos (2012) report a positive association
between investment bank quality and announcement-period return, but only for public targets –
not for unlisted targets. Given the very limited evidence on positive benefits from hiring
investment banks as M&A advisors, one would expect new entrants into this lucrative market. Our
study focuses on how accounting firms compete for financial advisory roles in this market.
Accounting firms can offer distinct advantages compared to investment banks. Specifically,
they can lever their audit expertise to produce fairer target valuation, particularly in industries
where the firms are audit-specialists, and when the target has poor reporting quality. McNichols
and Stubben (2015) document that acquisitions of targets with low accounting quality are less
profitable, as measured by lower acquirer announcement returns. They attribute the lower returns
to higher target valuation uncertainties. Marquardt and Zur (2015) also document negative
associations between target accounting quality and acquisition costs, such as time to complete the
transaction and the likelihood of deal completion. Raman, Shivakumar, and Tamayo (2013)
document that targets’ low quality earnings are associated with higher offer premium. Cai et al.
(2015) document that deals with a common auditor for the bidder and the target have higher
acquisition announcement returns than do non-common-auditor deals. They attribute the finding
to the information intermediation role of common auditors. In contrast, Dhaliwal et al. (2015)
emphasize the conflict of interest in deals with a common auditor shared by the target and the
9
acquirer.9
To our knowledge, no prior research has recognized the growing visibility of accounting firms
in the global M&A financial advisory market, nor examined their competitive strength and the
benefits they can provide to acquirer clients.
3. Data and Sample
We collect the sample of acquisitions from the SDC Platinum M&A database with the
announcement date falling in the years between 1990 and 2014 inclusively. We place no restriction
on the public status or nationality of the acquirer, nor on the industry of the acquirer or the target,
to minimize the risk of sample bias (Netter, Stegemoller, and Wintoki 2011). As is standard in
previous studies, we require deals with explicit change of control, i.e., the acquirer initially must
own less than 50% of the target’s stock and seek to own more than 50% after the acquisition. We
also require the availability of data on the announcement date, bidder cusip or sedol code, acquirer
advisor and acquirer advisor parent name, Standard Industrial Classification (SIC) code and
country of incorporation of the acquirer and the target, and deal value. To exclude ad-hoc advisors,
we retain advisors with at least ten M&A transactions over the sample period. These criteria give
rise to an initial sample of 22,494 acquisition transactions in the US, Canada, and 15 European
countries. By definition, these transactions exclude in-house acquisitions where the acquirers do
not employ a financial advisor (Golubov et al. 2012). SDC’s “Acquirer Financial Advisors
(Codes)” identifies the acquirer advisors and “Parent of Acquirer Advisors” the advisor’s parent
9
Cai et al. (2015) and Dhaliwal et al. (2015) restrict their samples to only public acquirers, public targets, and a
deal value of at least $1 (or $10) million. Netter, Stegemoller, and Wintoki (2011) find that requiring public targets
and a deal value of at least $1 million can drastically reduce the sample size, increasing the risk of sample bias. In
contrast, our primary sample for the advisor choice analysis includes both unlisted and listed targets and acquirers.
10
company. We use the latter to identify accounting firms as advisors do not share the same name
across markets. Appendix B1 illustrate the match between advisor and parent for PwC. We
manually identify the list of accounting firms based on the list of auditors on Compustat and
Compustat Global and searches on advisors’ websites. The list of SDC parent advisor codes and
names we use to identify accounting firms is included in Appendix B2. For multivariate tests that
examine choice of advisor and price reactions to merger announcements, we collect accounting
and market information from Compustat and CRPS for US stocks and from Compustat Global
Fundamentals and Compustat Global Security Daily files for non-US firms.
The dashed line in Figure 1 reports the frequency of M&As advised by accounting firms over
the period 1990–2014. Less than 1% of deals were advised by accounting firms over the period
1990–1992, and the proportion increases to 9% in 2001. The average proportion of deals advised
by accounting firms is stable over the period 2002–2014, at around 8% or 65 deals per year. To
provide context for Figure 1, the solid line reports the total number of M&A transactions over the
sample period. We observe that accounting firms were able to retain their market share during
market downturns following the internet bubble crash and the recent financial crisis. This result
suggests that accounting firms are not ad-hoc advisers that fill a gap in the market in periods of
high M&A activity where existing investment banks are unable to cope with the volume of
transactions.
[Figure 1]
Splitting the sample by bidder region, Figure 2a shows similar number of deals advised by
accounting firms in Europe as in the North American market (i.e., the US and Canada combined).
The time-trends in the figure mirror that in Figure 1. However, the picture changes when we
consider percentages in Figure 2b: the share of deals advised by accounting firms increases
11
gradually in Europe, reaching a peak of close to a third of all the deals in 2013. In contrast, their
share of the North American market is small, at less than 5%, and declining after 2002, which
coincides with the SOX regulation.10 This result suggests that differences in the market structure
between the US and Europe can explain why past research failed to identify accounting firms’
increasing activity in the M&A market.
[Figure 2a,b]
To provide more insights into the accounting firm activities across individual markets, Figure
3 reports the percentage of deals advised by accounting firms and the ratio of mean value of M&As
with accounting firm advisors to mean value of deals with investment bank advisors. Among
European countries, France has the lowest proportion of deals advised by accounting firms, but
the average size of the deals is 16% higher than that for investment banks. Over 15% of deals in
the UK, Austria and Spain are advised by accounting firms, though the average deals size is less
than half of that for investment banks. These results suggest that within Europe, there are
significant differences in the market activity of accounting firms. They more often advise on
smaller deals, which is consistent with their listing in Thomson Reuter’s rankings for medium and
small capitalization M&As.
[Figure 3]
4. The choice of accounting firm as M&A advisor
Our first test examines the likelihood an accounting firm will advise on a merger transaction.
We argue that accounting firms are more likely to advise on deals with high valuation uncertainty.
10
These trends may reflect higher volume of deals in the US than in Europe and lower head-count of corporate
finance departments in accounting firms than in established investment banks.
12
We use serval proxies to capture valuation uncertainty. Our first measures capture target’s
accounting quality because Raman, Shivakumar, and Tamayo (2013), Marquardt and Zur (2015)
and McNichols and Stubben (2015) document that target’s low accounting quality increases
valuation difficulties. Specifically, we consider firms with low accounting quality as those
belonging to an industry characterized by low accruals quality. We construct the measure at the
industry level because this allows us to retain private targets in the sample. We measure accrual
quality using the absolute value of total accruals for all listed firms in each market we examine
and then rank industries in ascending order. We then construct an indicator variable, Target in high
|Total Accruals| industry, which equals 1 if the target belongs to the top two industries with the
highest values of the equal-weighted average of the absolute total accruals of all the firms in the
industry and 0 otherwise.11
Our other valuation proxies include an indicator variable, Unlisted target, for whether the
target is an unlisted entity. Compared to listed companies, information about unlisted entities is
not as easily available owing to the lack of restrictions by stock exchange listing requirements or
the lack of incentives for voluntary disclosure (Singhvi and Desai 1971). We argue that unlisted
targets are more difficult to value given the limited information available and high information
search costs.
We consider the size of the target an important proxy for valuation difficulty. Smaller firms
are associated with lower quality information environments (Lang and Lundholm 1993). This is
likely to result in higher valuation difficulties. We measure target size by the log value of Deal
Value, which is the value of the M&A deal in concern.
11
In robustness tests, we also use variation in discretionary accruals from the Jones model (Jones 1991) to capture
accrual quality. Our conclusions are unchanged using this measure, though our sample reduces because of higher data
requirements.
13
Prior research has documented higher financial reporting quality under US GAAP than other
national GAAPs (Lang, Smith Raedy, and Wilson 2006). Significant differences remain despite
enhanced financial reporting comparability with US firms after adopting IFRS (Barth et al. 2012).
Thus, we expect a target located in the US to associate with low valuation uncertainties. To capture
this effect, we include a dummy variable, US target, for whether the target is located in the US.
Acquiring a target located outside the bidder’s home country is more challenging as the
information may be prepared in a different language and with different accounting practices
(Jeanjean et al. 2015). We expect cross-country deals to involve more valuation uncertainty.
Hence, we include an indicator variable, Cross-border, which equals 1 if the home country of the
target is different from that of the acquirer and 0 otherwise.
4.1 Control variables: deal financing and method of payment
We expect that bidders will be less likely to choose an accounting firm for deals that require
external equity or debt financing. This is because investment and commercial banks are better
suited to organize deal financing. A dummy variable Financing required captures the need for
external financing for the M&A transaction. The variable equals 1 if the source of funding for the
transaction is either borrowing, bridge loan, common stock issue, debt issue, junk bond issue,
mezzanine financing, rights issue, staple offering, or preferred stock, and 0 otherwise. We also control
for deal structure as firms are more likely to hire investment banks for more complex transactions
where the payment involves a mix of cash, equity or hybrid financing. The variable, Number of
considerations offered, counts the number of securities used in the payment for target stock.
As is standard in the literature, we control for the method of payment. We construct an
indicator variable, Cash offering, which takes the value of 1 if the transaction payment method is
14
cash and 0 otherwise. Cash offerings are more risky to the bidder since any cost related to offer
mispricing is born by the bidder after the transaction.
4.2 Control variables: past relation with the advisor
Sibilkov and McConnell (2014) document that past bidder relation with the advisor plays an
important role in predicting the choice of the advisor. Prior experience with an advisor builds trust
and allows the bidder to be sure on the strength of the advisor. To capture the effect, we include
an indicator variable, Returning acquirer advisor, which takes the value of 1 if the acquirer advisor
advised the bidder in a prior M&A deal and 0 otherwise.
4.3 Control variables: other deal characteristics
Other controls include deal characteristics such as the percentage of shares sought. Acquiring
a larger stake in the target is more costly as potential misvaluation has larger effect on bidder
shareholders. The variable Percentage of shares sought captures the percentage of target shares
the bidder seeks to acquire.
We control for the number of advisors on a deal. Because bidders may be skeptical about the
ability of accounting firms to advise on a transaction, they may want to pair them with investment
banks. Number of acquirer advisors counts the number of financial advisors advising the acquirer
in an M&A deal.
Bulge bracket and top-tier boutique investment banks dominate the M&A market in the US
(Wachtel 2015). This oligopolistic setting increases the barriers of entry for new competitors, thus
reducing the chances an accounting firm will advise on a deal. The indicator variable US acquirer
captures deals where the bidder is located in the US.
15
Acquirers may prefer to choose an investment bank with active presence in the target market,
which can facilitate information acquisition. However, not all countries have strong investment
banking presence, particularly by large investment banks. IB presence in target country is an
indicator variable for countries listed in Thomson Reuters M&A global rankings, which indicates
strong presence and competition among investment banks.12
We control for significant family ownership of the target as substantial family ownership may
increase negotiation difficulties and chances of deal collapse (Bena and Li 2014). This effect is
particularly important in Europe, which are characterized by greater ownership concentration in
the hands of families (Peterson-Withorn 2015 and Park, Li, and Lien 2015). The indicator variable
Family owned target captures significant family ownership of the target. It takes the value of 1
where a family or group of families controls at least 20% of the target and 0 otherwise .
We include a dummy variable, SOX, to capture the fixed effect arising from the regulatory
change in the US due to the SOX regulation. Section 201 of the SOX prohibits auditors from
providing a number of non-audit services, including investment banking services, to audit clients.
Soon after the SOX was enacted, three of the big four divested their advisory and consulting
practices in the US (Harris 2014). Thus, we expect a lower likelihood of an accounting firm
advising on a merger following the regulation as accounting firms acting as auditors were banned
from providing financial advisory services to their audit clients.13
12
The countries are Argentina, Australia, Belgium, Brazil, Canada, China, Denmark, Finland, France, Germany,
Hong Kong, India, Italy, Mexico, Netherlands, New Zealand, Norway, Spain, Sweden, United Kingdom, and United
States.
13
“As part of [the] divestitures, the accounting firms signed non-compete agreements with their former consulting
divisions. By the mid-2000s, these agreements had expired, paving the way for the firms to rebuild in consulting —
under the guise of ‘advisory’ work — through a series of acquisitions. ... Non-audit work now makes up some 60 per
cent of the Big Four’s total global revenues, compared with under half in 2004.” (Agnew 2015a)
16
4.4 Control variables: acquirer characteristics
We control for Acquirer size, measured by the acquirer’s market capitalization, as larger firms
may prefer to use reputable investment banks rather than accounting firms. For comparison
between countries, we express firm market capitalization in USD using the exchange rate from
end of January 2005.
The acquirer’s book-to-market ratio, Acquirer B/M, and stock return momentum, Acquirer
stock momentum, capture the overpricing of the bidder’s stock. Stock overvaluation increases the
chances of opportunistic acquisitions (Akbulut 2013). We expect that the bidder may prefer an
investment bank advisor to add credibility to such transactions. Similarly, we expect firms with
higher diversity of opinion about firm prospects to choose investment banks to certify the prospects
of the transaction. We use the acquirer’s share price volatility to capture diversity of opinion,
Acquirer stock volatility.
4.5 Control variables: country characteristics
The shareholder governance model in countries with a UK common law legal origin makes
managers more accountable (Ball, Kothari, and Robin 2000), increasing the risk that negative deal
outcomes may lead to the dismissal of the managerial team (Lehn and Zhao 2006). To reduce this
risk, bidders may choose accounting firm advisors if this choice leads to fairer target valuation.
We include an indicator variable, Common Law, for acquirers located in common law countries to
capture this effect.
We control for differences in average ownership structures between bidder countries using the
variable Ownership concentration. This is the ownership concentration index from La Porta et al.
(1998). It is defined as the median proportion of common shares owned by the three largest
17
shareholders in the ten largest privately owned non-financial firms. Previous research shows that
more concentrated ownership increases the monitoring of managers (Jensen and Meckling 1976
and Schleifer and Vishny 1986). Given the greater monitoring in countries with more concentrated
ownership, we expect bidders in these countries to have a stronger incentive to hire accounting
firm advisors to reduce target valuation uncertainty.
Lower-quality disclosure increases information search and acquisition costs and thus
valuation uncertainty. We expect bidders to have a stronger incentive to hire accounting firm
advisors if the target country has lower-quality disclosure regulation. We include an indicator
variable, Lower-quality disclosure regulation, which equals 1 if the target country’s disclosure
regulation is weakly lower in quality than that of the bidder country. The quality of disclosure
regulation is measured by the country disclosure scores from Hope (2003).
We control for differences in the extent of earnings management across countries. Previous
studies suggest that more earnings management increases valuation uncertainty as accounting
information is less reliable. This may increase the need for accounting firms’ expert opinions.
More aggregate earnings management is an indicator variable for cases where the target country’s
aggregate earnings management score is higher than that of the bidder country. The score is from
Leuz, Nanda, and Wysocki (2003). For completeness, we also include the bidder’s country
disclosure score, Disclosure regulation, and aggregate earnings management score, Aggregate
earnings management, in the regressions of the advisor choice analysis.
All regressions control for the industry and year effects. The statistical tests on the estimated
coefficients of the regressions are based on clustered standard errors robust to within-acquirer and
year correlation (Rogers 1993) and heteroskedasticity-adjusted (White 1980). All continuous
explanatory variables used in the regressions are winsorized at the 1st and 99th percentiles.
18
The specification of the logit model predicting the adviser choice is as follows:
Pr(Accounting firm acquirer advisor) = f(variables for valuation uncertainty,
deal financing and method of payment,
past relation with the advisor,
other deal characteristics,
acquirer characteristics,
country characteristics),
(1)
where f is the cumulative distribution function of the standard normal distribution. Table 1
summarizes the definitions of the variables used in the advisor choice model and other analyses of
the paper.
[Table 1]
Table 2 shows the descriptive statistics of the variables used in the advisor choice analysis.
They are partitioned into the M&A deals advised by accounting firms and by investment banks.
The t-tests for differences in the means of the variables across the two groups are reported in the
last column. Deals advised by accounting firms tend to be for targets in industries with lower
accruals quality, that are unlisted and outside the US, and in cross-border transactions. These
univariate results provide preliminary evidence that accounting firms advise on deals difficult to
value. We also observe a large difference in the mean size of the deals advised by accounting firms
and by investment banks. Despite the statistically insignificant t test on the means, the medians
reveal that deals advised by accounting firms are much smaller. Finally, we document that
accounting firms are more likely to advise on deals where the target’s country has a higher
aggregate earnings management score than the bidder’s. Together, these results suggest that
bidders are more likely to hire accounting firm advisors when target valuation uncertainty is high.
19
[Table 2]
Looking at the control variables in Table 2, we observe that deals advised by accounting firms
infrequently require external financing, involve multiple payment forms, or use non-cash payment
method. Investment banks have competitive advantages in those areas. Because acquirers advised
by investment banks tend to be larger, these acquirers are likely to have more M&A activities in
the past and establish a relation with a specific investment banks. This explains why these bidders
are more likely to choose an investment banks that advised on a previous transaction.
Accounting firms more often advise on deals where the bidder is located outside the US and
in countries without a strong presence of investment banking. Smaller bidders, who are located in
non-common-law countries, with lower ownership concentration, lower-quality disclosure
regulation, lower B/M ratio and higher share price volatility are more likely to hire accounting
firm advisors for their M&A transactions.
4.5 Regression results for the advisor choice model
Table 3 presents regression results for the advisor choice model. We confirm the univariate
evidence that accounting firms more frequently advise on deals with higher valuation uncertainty.
These include deals with the targets from the industries characterized by low accruals quality,
unlisted targets, non-US targets, targets of cross-border deals, and smaller targets as measured by
deal value. These results hold when we control for proxies for deal financing and payment method,
and past bidder relation with the advisor. Further, auditors are more likely to advise on deals where
the target country’s aggregate earnings management score is higher than the acquirer’s country,
which corroborates our conclusion.
The valuation uncertainty proxies are economically important predictors of the advisor choice.
20
The odds an accounting firm will advise on an M&A transaction are 36% higher when the target
is in a low accruals quality industry, 1.85 times higher for unlisted targets, 60% lower for non-US
targets, 26% higher for cross-border deals, and 31% higher when the aggregate earnings
management score in the target country is higher than in the bidder country. These results suggest
that bidders consider accounting firms better set to resolve valuation uncertainties than investment
banks.
[Table 3]
In unreported results, we repeat the analysis using the variation in discretionary accruals from
the Jones model (Jones 1991) to capture target’s industry accruals quality and find consistent
results. Thus, our conclusion is not changed with this alternative measure of accounting quality.
We also repeat the analysis confined to big four accounting firms (Big4) and still find that the
proxies for valuation uncertainty are strong predictors of the choice of Big4 as M&A financial
advisors.14
The signs for control variables are similar to the univariate results. Importantly, we document
that accounting firms were less likely to win advisory roles after the passage of the SOX. This
effect is economically significant: the odds a bidder hires an accounting firm are 45% lower after
the regulation. This suggests the regulation imposed a significant barrier for accounting firms to
compete with investment banks in the US market. This result helps explain Figure 2 evidence,
which shows much higher relative activity of accounting firms in Europe than in the US. From
14
We recognize that because of familiarity, bidders may choose the same accounting firm as their auditor. We can
identify bidder auditors for 6.1% of all deals and for those cases, in 34% of transactions the auditor is also the advisor
on the deal (for obvious reason, we cannot include this control in the advisor choice analysis). This result likely reflects
that accounting firms avoid joint roles of auditor and M&A advisor because of potential regulatory scrutiny. We also
check instances where the bidder chooses an accounting firm that audits the target. We find that in only two cases
bidders had accounting advisors who were also auditors for the target. This likely reflects that accounting firms try to
avoid potential conflicts of interest arising from these dual roles (Dhaliwal et al. 2015).
21
other noteworthy results, we find that accounting firms are more likely to advise as part of a team
rather than as single advisors. This result suggests that accounting firms may be chosen to certify
the transaction quality to bidder shareholders, e.g., reliability of synergy gain estimates. Further,
accounting firms are more likely to be hired as advisors when the acquirer country has poorer
disclosure regulation and a higher aggregate earnings management score. This result further
reinforces the conclusion that target valuation uncertainties play an important role in the choice of
the accounting firm as a deal advisor.
6. Acquirer announcement return
Next, we examine whether investors perceive transactions advised by accounting firms more
favourably compared to deals advised by investment banks. If investors perceive that accounting
firms can resolve information uncertainty and reduce the risk of deal failure, we would expect a
more positive price reactions to deal announcements. For this test, we calculate a five-day
announcement period cumulative abnormal return, CAR, where the normal return benchmark is
the stock market index of the acquirer's listing exchange.
Our main variable of interest is the indicator variable for accounting firm advisor. We expect
this variable to load positively when regressed on announcement day returns. To test the prediction
that accounting firms bring valuable accounting knowledge, we also create an indicator variable
that captures the industry specialization of the parent audit firm, AF advisor with industry expertise
on accounting. This variable takes the value of 1 if the acquirer advisor is an accounting firm
whose parent firm has expertise as an audit-specialist of the target’s industry and 0 otherwise. An
industry audit-specialist is defined analogously according to the dominant player definition in
Reichelt and Wang (2010), with the market shares by audit clients’ total assets substituting for the
22
market shares by audit fee in the original definition.
Because industry-knowledge should be particularly valuable for targets in industries with low
accounting quality, we interact the industry specialization variable with the indicator variable
Target in high |Total Accruals| industry. We expect that investors will react more favorably when
the bidders hire an accounting firm to advise on deals where the target is in a low accounting
quality industry and the accounting firm can lever on the parent’s audit expertise in evaluating
accounting information for this industry.
The regression controls are standard. We control for the method of payment as cash-financed
acquisitions elicit more favorable price reactions (Travlos 1987). We control for the previous
relation between the bidder and the advisor as acquirers are more likely to retain better performing
advisors. We also control for the size of the advisory team as larger teams may benefit from the
synergy of expertise between partners in the team and can ensure better risk sharing and
monitoring, which can produce better outcomes (Hunter and Jagtiani 2003). Previous research
documents higher price reaction for larger transactions (Golubov et al. 2012), so we control for
size of the deal. We also include controls for cross-border deals and for whether the target has
significant family ownership as these transactions tend to have disappointing outcomes (Eckbo
and Thorburn 2000; Basu, Dimitrova, and Paeglis 2009) Finally, we also control for deals made
after the passage of the SOX and include acquirer firm and country controls from the advisor
choice model, as well as dummy variables for the year and industry fixed effects.15
The specification of the regression model for the acquirer announcement return analysis is as
follows (with deal subscripts omitted for brevity):
15
We do not include the offer premium in the regression because (i) previous studies show an insignificant relation
between the offer premium and price reactions (e.g. Golubov et al. 2012), and (ii) the offer premium is only available
for public targets, which would substantially reduce the sample size.
23
CAR = α0 + α1 AF advisor + α2 AF advisor with industry expertise on accounting
+ α3 (AF advisor with industry expertise on accounting
× Target in high |Total Accruals| industry)
+ α4 Target in high |Total Accruals| industry
+ Λ5 Controls + Λ6 Year effects + Λ7 Industry Effects + ε
(2)
The indicator variable AF advisor takes the value of 1 if an accounting firm is hired to advise
on an M&A deal and 0 otherwise.
Because the advisor choice is unlikely to be random, we also estimate equation (2) for a
restricted sample with deals advised by accounting firms matched with deals advised by
investment banks. The matching is based on propensity scores estimated from equation (1). This
approach generates a sample of 1,660 deals advised by accounting firms and by investment banks
with non-missing information on announcement-period returns. Results from the matched sample
should not be subject to endogeneity concerns.
Panel A of table 4 reports average CARs for deals split by the type of acquirer advisor. For
the full sample, price reactions for deals advised by accounting firms are on average nearly three
times higher than those advised by investment banks (2.03% vs. 0.68%). This difference translates
into a $148 million shareholder value gain for a mean-sized bidder. For the PSM sample, the
difference in CARs is similarly large (2.03% vs. 1.10%), which generates $102 million gain in
shareholder wealth at the announcement for a mean-sized bidder. These results suggest substantial
gains to bidders when they hire accounting firms to advise on M&As.
[Table 4]
We confirm higher price reactions to M&As advised by accounting firms in panel B of table
4, which shows estimates for equation (2). The coefficient on AF advisor is positive for the full
24
sample as well as the PSM sample. Further, we show that price reactions are higher for deals where
accounting firms have competitive advantages, namely for deals where the target is in an industry
with low accruals quality and the accounting firm is an audit-specialist for this industry. These
results indicate that investors recognize that accounting firms may use their audit expertise to
produce fairer target valuations.
The coefficient estimates for the controls are consistent with past evidence. Importantly, the
PSM sample regression indicates that deals with a target from a low accounting quality industry
are received less favorably by investors. This result is consistent with the higher valuation
uncertainty of these targets and a higher likelihood of overpayment (McNichols and Stubben
2015). As we show in the next section, bidders are less likely to overpay for targets with low
accounting quality when they hire accounting firm as advisors.
In unreported results, we also estimated equation (2) for deals with sole advisors and find
similar results to Table 4. This suggests that our conclusions are not driven by deals where
accounting firms are paired with investment banks. Further, the results remain qualitatively the
same when we use the variation in discretionary accruals from the Jones model (Jones 1991) to
capture accruals quality. This is the case despite a smaller sample size due to higher data
requirements. Hence, our conclusion remains unchanged for this alternative measure of accounting
quality.
5. Target valuation: offer premium
Previous studies document that valuation uncertainty increases the likelihood the bidder will
overpay for the target. Laamanen (2007) finds that the acquisition premium tends to be higher
when it is more difficult to value a target’s resources (e.g., R&D-related assets) and reports an
25
average premium in the US ranging between 30–50% between 1970s–2000s. McNichols and
Stubben (2015) document that bidders pay less to acquire a target with high-quality accounting
information, which they attribute to better accounting quality mitigating the risk of overpaying for
the target. We argue that the competitive advantage of accounting firms as M&A advisors stems
from their expertise in target valuation. Specifically, accounting acquirer advisor help reduce the
uncertainty in target valuation and reduced valuation uncertainty allows the acquirer to estimate
more accurately the target’s reservation price and thereby lower the offer premium. We test this
prediction next.
We define the variable Offer premium as (the ratio of the bid price per share to the target’s
closing stock price 1 day prior to announcement – 1) × 100. Like Dimopoulos and Sacchetto
(2014), we consider only the premium corresponding to the final offer. This is the winning bid in
a successfully completed takeover or otherwise the last withdrawn bid in an unsuccessful takeover.
As is standard in the literature, we winsorize offer premium at the 1% level.
The specification of the regression model for the offer premium analysis is as follows:
Offer premium = β0 + β1 AF advisor + β2 AF advisor with industry expertise on accounting
+ β3 (AF advisor with industry expertise on accounting
× Target in high |Total Accruals| industry)
+ β4 Target in high |Total Accruals| industry
+ Β5 Controls + Β6 Year effects + Β7 Industry Effects + ε
(3)
As in the acquirer announcement return analysis, the coefficients of interest are β1–β3. We expect
accounting firms to help negotiate lower average premia, particularly for firms with low accruals
quality.
The set of controls includes Unlisted target as information search costs are higher for these
26
targets, which can increase offer premium. We include Returning acquirer advisor to control for
past bidder relation with the advisor as previous advisors may be better able to assess expected
synergy gains, which affect the offer premium (Sibilkov and McConnell 2014). The certification
hypothesis suggests that more reputable advisors should be better at negotiating more favorable
deal conditions (Chemmanur and Fulghieri 1994). To capture this effect, we include a measure of
advisor reputation, Last year's total deal value of acquirer advisors, which is the total value of all
the M&A deals advised by the acquirer advisors in the year prior to the M&A deal. We also include
the Number of acquirer advisors as larger advisory teams might be better negotiating down the
offer price. Financing required is included to control for whether the deal will be financed by
external financing as premia financed by internal cash tend to be higher (Huang and Walkling
1987 and Savor and Lu 2009). Prior studies find that significant family ownership has a negative
association with takeover premia (Villalonga and Amit 2006; Holmen and Nivorozhkin 2005),
which is attributed to lower bargaining power and higher willingness to accept lower offer price
by family owned targets. Thus, we include the control Family owned target. Lastly, we control for
Deal value as a proxy for the target firm size because Alexandridis et al. (2013) find a negative
relationship between target firm size and offer premium.
Panel A of Table 5 reports average premia for the sample split by the type of advisor. M&As
with accounting firm advisors have on average 24.7% lower premia compared to deals advised by
investment banks (22.3% vs. 29.7%). This translates into average savings of $135 million for a
mean-sized deal. This univariate result provides preliminary evidence suggesting accounting firms
may be better set to value M&A targets.16
16
We do not report PSM results because of a very small sample size in this case (168 observations), which leaves
few degrees of freedom for estimation.
27
[Table 5]
Panel B of the table reports estimates for model (3). We confirm univariate results of lower
premia for deals advised by accounting firms. Further, the valuation strength of accounting firms
seems particularly strong in cases where the target is in a lower accounting quality industry and
the accounting firm is an audit-specialist of the industry. The positive coefficient of Target in high
|Total Accruals| industry is consistent with prior research suggesting that investors tend to overpay
for targets with poor accounting quality (McNichols and Stubben 2015). The results of Table 5
help explain our price reaction results—investors recognize the competitive skill of accounting
firms in valuation and anticipate the relatively lower premium the bidder will pay for the target.
Because the offer premium requires target share price, our sample is limited only to public
targets. To control for endogeneity related to the choice of advisor for public deals, we use
instrumental variables. As an instrument, we use an indicator variable, IB presence in target
country, for whether the target country has strong investment banking presence as the likelihood
of choosing an investment bank may reduce if there is no subsidiary in the target country. The
second instrument is an indicator variable, Acquirer has prior experience using AF advisor, for
whether the firm hired an accounting firm for an M&A transaction in the previous five years.
Bidders are more likely to hire an accounting firm if a previous relation exists. The final instrument
is the indicator variable, AF advisor has acquirer industry expertise on accounting, for whether
the parent audit firm is a specialist of the acquirer industry. The acquirer may be more aware that
an accounting firm is also involved in M&A advisory services if the accounting firm is the auditspecialist of the acquirer’s industry. We do not expect any of the instruments to correlate with the
offer premium and the test of overidentifying restrictions comfortably rejects the hypothesis the
instruments are not valid. Last columns of Table 5 report results from 2SLS regressions, and we
28
confirm that accounting firms negotiate lower offer premia. Together, the results in Table 5
confirm superior valuation skills of accounting firms that translate into more competitively priced
transactions for the bidder.
6. Deal completion rate
Our results reveal that accounting firms help mitigate valuation uncertainty inherent in M&As,
but managers may be also concerned about the deal completion. Failed transactions increase the
turnover risk for the managerial team (Jacobsen 2014) and associate with negative price reactions
(Jacobsen 2014; Davidson, Dutia, and Cheng 1989). Merger failure can occur for a variety of
reasons, which include the occurrence of “material adverse effect” events, problems discovered
during the due diligence process or a receipt of a higher bid (Luo 2005).17 Broadly, the likelihood
a deal will be terminated increases with the probability new information becomes available to the
bidder after the deal announcement regarding the true value of the target (Marquardt and Zur
2015). Because accounting firms should be better at analyzing target information before the
announcement, collected from public sources and via the parent audit firm, the risk material
information will emerge after the announcement should be lower.
To test the prediction that accounting firms help resolve the uncertainty new information on
target true value will lead to deal termination, we identify all deals with SDC withdrawn status.
There are 962 transactions falling into this category or 6.6% of the sample. We create an indicator
variable, Withdrawn, taking the value of 1 for withdrawn deals and 0 otherwise. We then regress
this variable on AF advisor and other variables using the following specification of a logit model:
17
Material adverse effect (MAE) clauses allow the bidder to terminate the deal if specific events are triggered,
which include economic or industry shocks, financial misreporting, and regulatory changes (Denis and Macias 2013).
29
Pr(Withdrawn = 1) = f(AF advisor, Controls, Year effects, Industry Effects),
(4)
where f is the cumulative distribution function of the standard normal distribution. The controls
are the variables predicting effort and difficulty in collecting information about the target: prior
bidder relation with the advisor (Returning acquirer advisor), reputation of the advisor (Last year's
total deal value of acquirer advisors), size of the advisory team (Number of acquirer advisors),
whether target is in a low accounting quality industry (Target in high |Total Accruals| industry),
unlisted target (Unlisted target), significant family ownership (Family owned target), and target
size proxy (Deal value).
Panel A of table 6 reports the average frequency of withdrawn transactions split by the advisor
type for the full sample and the PSM sample. M&As advised by investment banks have 61 times
higher chances of withdrawal compared to deals advised by accounting firms (7.01% vs. 0.11%).
For the PSM sample we observe a similar result: deals with investment bank advisors have 12
times higher chance of failure (1.48% vs. 0.11%). This result confirms the lower risk of withdrawal
for deals with accounting firm advisors.
[Table 6]
Panel B reports the results of the logit regression for the deal withdrawal analysis. The
significant coefficient on the AF advisor variable confirms that accounting firms reduce the
likelihood of deal withdrawal. This result is present for the full sample and the PSM sample.18 The
results in this table corroborate the conclusion that accounting firms are better able to analyze and
gather information about the target before the transactions, which reduces the risk new information
will lead to deal withdrawal.
18
For the PSM sample regression, we had to exclude Target in high |Total Accruals| industry and Family owned
target as none of the M&As withdrawn has a value of 1 for these indicator variables. For similar reason, we do not
control for year and industry effects for this sample.
30
7. Accounting firms’ future advisory role
Our results thus far document significant benefits, in terms of fairer valuation and a lower risk
of deal withdrawal, to acquirers hiring accounting firm advisors. Our final test shows that bidders
recognize these benefits and re-hire accounting firms to advise on future M&A transactions. For
this test, we create an indicator variable, Prior experience using AF advisor, for whether the bidder
hired an accounting firm advisor in the previous five years. We expect that previous positive
experience from hiring an accounting firm will translate into future business for the whole category
of accounting firm advisors.
Panel A of table 7 reports the frequency of deals advised by accounting firms and by
investment banks, conditional on the bidder using an accounting firm advisor previously. We
observe that acquirers are two times more likely to hire an accounting firm advisor if they already
had an experience with accounting firm advisors. This supports the prediction that bidders reward
accounting firms with future business.
[Table 7]
Next, we examine our prediction in a regression setting. Specifically, we expand the logit
regression for the advisor choice analysis, equation (1), to include Prior experience using AF
advisor. Panel B reports abbreviated regression results confirming that bidders are more likely to
hire an accounting firm advisor if they had used accounting firm advisors before. Specifically, the
odds a bidder will choose an accounting firm advisor are 1.7 times higher if the bidder used an
accounting firm advisor in a previous M&A. This result confirms that acquirers recognize the
benefits from accounting firm advisory roles and seek to capture similar benefits in future business.
31
8. Conclusion
The superior accounting knowledge of accounting firm advisors allows them to better assess
a target’s value. Analyzing accounting information is no doubt the central expertise of accounting
firms. They are stronger in understanding how different accounting manipulation techniques could
have distorted the reported information and are less likely to be misled. They also have stronger
expertise in judging the competence of the target’s accounting personnel, the quality of its
accounting information system, and the effectiveness of the internal control and corporate
governance mechanisms in place, on top of the independent evaluation by the accountant assisting
the due diligence process. Therefore, accounting firm advisors are more likely to reach at a more
precise valuation of the target, mitigating the valuation uncertainty that otherwise might give rise
to an overpaid offer premium or reduce the deal completion likelihood. In sum, accounting firm
advisors have a distinct edge over investment bank advisors in every aspect where accounting
matters.
To our knowledge, we are the first to document the growing visibility of accounting firms in
the global M&A financial advisory market. We obtain evidence showing that accounting firm
advisors are more preferred by acquirers interested in targets from an industry characterized by
low accounting accruals quality, in smaller targets, when the target is a private firm, is located
outside the US, and for cross-country deals. Further, accounting firms are more likely to advise on
deals where the target’s country aggregate earnings management score from Leuz, Nanda, and
Wysocki (2003) is higher than that of the acquirer home country. This evidence is consistent with
the perspective that the superior accounting knowledge of accounting firm advisors is particularly
useful in resolving target valuation uncertainty in those circumstances.
32
Most importantly, we find evidence confirming various benefits to acquirers choosing
accounting firm advisors: higher announcement returns to acquirers reflecting net gains anticipated
from the acquisitions, lower offer premiums to targets, and higher deal completion rates. These
benefits explain why accounting firms have a growing visibility in the global M&A financial
advisory market.
33
Appendix A. Thomson Reuters Worldwide Mid-Market Rankings for the first quarter of 2015.
The graph reports Thomson Reuters Worldwide Rankings of M&A advisors for the mid-capitalization and small-capitalization M&As.
34
Appendix B1. Names of M&A advisors associated with PwC
The table shows names of advisors on SDC and their codes where the parent is PwC.
Advisor name
Price Waterhouse Corporate Fin
Pricewaterhouse Coopers Secur
PricewaterhouseCoopers
PricewaterhouseCoopers (Aus)
PricewaterhouseCoopers (JP)
PricewaterhouseCoopers (SG)
Pricewaterhousecoopers Corpora
PricewaterhouseCoopers Secur
PwC Advisory Co Ltd (JP)
PwC Transaction Services Inc
PricewaterhouseCoopers (UK)
SDC advisor code
PRICE-CORP-FIN
PWC-SECURITIES
PWC
PWC-AUS
PWC-JAPAN
PWC-SG
PWC-CF-SAS
PWC-SEC
PWC-ADV-JAPAN
PWC-TRANS-SVCS
PWC-UK
Parent Name
PricewaterhouseCoopers
PricewaterhouseCoopers
PricewaterhouseCoopers
PricewaterhouseCoopers
PricewaterhouseCoopers
PricewaterhouseCoopers
PricewaterhouseCoopers
PricewaterhouseCoopers
PricewaterhouseCoopers
PricewaterhouseCoopers
PricewaterhouseCoopers
Appendix B2. SDC parent advisor codes and names
The table reports parent advisor codes and names of accounting firms on SDC.
SDC parent advisor codes
ARTHUR-ANDERSEN
BAKER-TILLY-INT
BDO
CROWECLARK
DELOITTE
ERNST-YOUNG
GRANT-INTL
HMT-CORP-FIN
KPMG
MCGLADREY-CM
PANNELL-KERR
PKF-INTL
PKFITALIA
PWC
RSM-BENTJEN
RSM-TENON
RSMROB
SMITH-W
TENON-GROUP
SDC parent advisor names
Arthur Andersen
Baker Tilly
BDO
Crowe Clark Whitehill
Deloitte
Ernst & Young
Grant Thornton
Hurst Morrison Thomson
KPMG
McGladrey Capital Markets
Pannell Kerr Forster
PKF International
PKF Italia
PricewaterhouseCoopers
RSM Bentley Jennison
RSM Tenon Group
RSM Robson Rhodes
Smith & Williamson Securities
Tenon Group
35
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Figure 1. Percentage of M&As advised by accounting firms (N=22494)
12%
Total number of M&A transactions
2000
1800
10%
% of M&As advised by accounting firms
1600
1400
8%
1200
6%
1000
800
4%
600
400
2%
200
0%
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
41
Figure 2a. Number of M&As advised by accounting firms: US&Canada vs. Europe
1000
900
US&Canada
800
700
Europe
600
500
400
300
200
100
0
Figure 2b. Proportion of M&As advised by accounting firms: US&Canada vs. Europe
30%
25%
20%
US&Canada
Europe
15%
10%
5%
0%
42
Figure 3. Percentge and mean-value ratio of accounting-firm-advised deals across countries (N=22494)
25%
1.4
Percentage of deals advised by accounting firms
20%
Ratio of mean value of deals advised by accounting firms to that by
investment banks
1.2
1.0
15%
10%
0.8
0.6
0.4
5%
0.2
0%
0.0
43
Table 1
Variable definitions
This table presents the definitions of the main variables used in the study. An industry is defined based on the twodigit SIC code.
Variable
Definition
Deal characteristics
Deal value
The market value of the shares sought in the M&A deal
Percentage of shares sought
The percentage of target shares the bidder seeks to acquire (1 = 100%)
Offer premium
(the ratio of the bid price per share to the target’s closing stock price 4 weeks prior to
announcement – 1) × 100
Number of acquirer advisors The number of financial advisors advising the acquirer in the M&A deal
Last year's total deal value of The total value of all the M&A deals advised by the acquirer advisors in the year prior
acquirer advisors
to the M&A deal
Financing required
An indicator variable equal to 1 if the source of funding for the transaction is either
Number of considerations
offered
Cash offering
Withdrawn
Returning acquirer advisor
AF advisor
AF advisor with industry
expertise on accounting
SOX
Year effects
Acquirer characteristics
Acquirer size [MV (USD)]
Acquirer B/M
Acquirer stock momentum
Acquirer stock volatility
borrowing, bridge loan, common stock issue, debt issue, junk bond issue, mezzanine
financing, rights issue, staple offering, or preferred stock, and 0 otherwise.
The number of securities used in the payment for target stock.
An indicator variable equal to 1 if the transaction payment method is cash and 0
otherwise.
An indicator variable equal to 1 if the deal offer is withdrawn by the acquirer and 0
otherwise.
An indicator variable equal to 1 if the acquirer advisors advised the acquirer in a prior
M&A deal and 0 otherwise
An indicator variable equal to 1 if the acquirer advisor is an accounting firm and 0
otherwise
An indicator variable equal to 1 if the acquirer advisor is an accounting firm whose
parent audit firm has expertise as an audit-specialist of the target’s industry and 0
otherwise. An industry audit-specialist is defined analogously according to the
dominant player definition in Reichelt and Wang (2010, p. 656), with the market
shares by audit clients' total assets substituting for the market shares by audit fee in
the original definition.
An indicator variable equal to 1 if the M&A deal is in the era after the Sarbanes-Oxley
Act was enacted on 30 July 2002 and 0 otherwise
Year dummy variables for the M&A deal announcement year.
Acquirer's market capitalization measured at the end of the fiscal year before the
M&A deal date and expressed in USD millions.
Acquirer's book value of equity to market value of equity ratio at the fiscal year end
prior to the M&A deal
Acquirer's buy-and-hold stock returns for 90-days prior to the previous fiscal yearend.
Stock price standard deviation measured over 90-days before the previous fiscal yearend, scaled by the mean price level over this period.
(continued on next page)
44
Table 1 (continued)
Variable
Definition
Acquirer characteristics (continued)
Prior experience using AF
advisor
US acquirer
Industry effects
Target characteristics
An indicator variable equal to 1 if the acquirer has chosen an AF advisor in an M&A
deal in the previous five years, and 0 otherwise.
An indicator variable equal to 1 if the acquirer is incorporated in the US and 0
otherwise.
Acquirer's industry dummy variables.
Target in high |Total
Accruals| industry
An indicator variable equal to 1 if the target belongs to the top two industries with the
highest values of the equal-weighted average of the absolute values of the total
accruals of all the firms in the industry and 0 otherwise
Unlisted target
An indicator variable equal to 1 if the target is not a firm listed on an exchange and 0
otherwise
Cross-border
An indicator variable equal to 1 if the target is incorporated in a country different
from the acquirer's country of incorporation and 0 otherwise.
US target
An indicator variable equal to 1 if the target is incorporated in the US and 0 otherwise
IB presence in target country An indicator variable equal to 1 if the target country is listed in the Thomson Reuters
M&A global rankings (i.e., Argentina, Australia, Belgium, Brazil, Canada, China,
Denmark, Finland, France, Germany, Hong Kong, India, Italy, Mexico, Netherlands,
New Zealand, Norway, Spain, Sweden, United Kingdom, and United States) and 0
otherwise.
Family owned target
An indicator variable equal to 1 if a family or group of families controls at least 20%
of the target and 0 otherwise. Sourced from SDC Platinum.
Country characteristics (Acquirer)
Common law
An indicator variable equal to 1 if the legal system of the bidder country originates
from the UK common law system and 0 otherwise. Sourced from La Porta et al.
(2006)
Ownership concentration
Ownership concentration index of the acquirer's country of incorporation, which is
the median proportion of common shares owned by the three largest shareholders in
the ten largest privately owned nonfinancial firms. Sourced from La Porta et al.
(2006)
Disclosure regulation
A measure for the bidder country based on the country disclosure score from Hope
(2003). The higher the score, the higher the quality of the disclosure regulation in the
country.
Aggregate earnings
An aggregate score of the earnings management activities of the nonfinancial firms in
management
the acquirer's country of incorporation. Sourced from Leuz et al. (2003)
Country characteristics (Target)
Lower-quality disclosure
regulation
An indicator variable equal to 1 if the target country’s disclosure regulation is lower
in quality than that of the bidder country. The quality of disclosure regulation is
measured by the country disclosure scores from Hope (2003). The higher the score,
the higher the quality of the disclosure regulation in the country.
More aggregate earnings
management
An indicator variable equal to 1 if the target country’s aggregate earnings
management score is higher than that of the bidder country and 0 otherwise. The
score is from Leuz et al. (2003).
45
Table 2
Descriptive statistics
This table presents the descriptive statistics of the variables used for analysis. All variables are defined in table 1.
(1)
Accounting firm acquirer advisor
(N = 880)
Mean
Median
S.D.
(2)
Investment bank acquirer advisor
(N = 13,716)
Mean
Median
S.D.
Target in high |Total Accruals| industry
0.043
0.000
0.203
0.040
0.000
Unlisted target
0.867
1.000
0.340
0.560
US target
0.164
0.000
0.370
Cross-border
0.539
1.000
0.499
Variable
(1) - (2)
Difference in mean
% diff.
t
0.197
7.3%
10.34
1.000
0.496
54.8%
44.87
0.543
1.000
0.498
−69.9%
−52.99
0.344
0.000
0.475
56.5%
32.64
−80.7%
−0.01
A. Valuation uncertainty
Deal value
353
48
2,211
1,835
304
6,359
0.624
0.066
4.308
13.027
0.203
562.069
−95.2%
−0.20
Financing required
0.140
0.000
0.347
0.196
0.000
0.397
−28.5%
−23.42
Cash offering
0.420
0.000
0.494
0.393
0.000
0.488
6.9%
4.04
Number of considerations offered
1.407
1.000
0.675
1.598
1.000
0.892
−12.0%
−4.98
0.297
0.000
0.457
0.391
0.000
0.488
−24.1%
−15.08
Deal value / Acquirer size
B. Deal financing and method of payment
C. Past relation with the advisor
Returning acquirer advisor
D. Other deal characteristics
−0.1%
0.00
Number of acquirer advisors
1.481
1.000
0.846
1.590
1.000
1.015
−6.9%
−2.30
US acquirer
0.183
0.000
0.387
0.558
1.000
0.497
−67.2%
−49.01
IB presence in target country
0.870
1.000
0.336
0.933
1.000
0.250
−6.7%
−5.82
Family owned target
0.002
0.000
0.048
0.002
0.000
0.049
−5.5%
−33.36
SOX
0.652
1.000
0.477
0.583
1.000
0.493
11.9%
7.14
Percentage of shares sought
91.4
100.0
20.9
91.4
100.0
21.4
(continued on next page)
46
Table 2 (continued)
Variable
(1)
Accounting firm acquirer advisor
(N = 880)
Mean
Median
S.D.
(2)
Investment bank acquirer advisor
(N = 13,716)
Mean
Median
S.D.
(1) - (2)
Difference in mean
% diff.
t
−42.5%
0.00
E. Acquirer characteristics
Acquirer size [USD]
6,452
824
53,048
11,228
1,790
367,866
Acquirer B/M
0.688
0.482
0.740
0.618
0.461
0.855
11.4%
4.38
Acquirer stock momentum
0.105
0.050
0.377
0.105
0.057
0.426
−0.7%
−0.54
Acquirer stock volatility
0.115
0.061
0.187
0.104
0.061
0.156
10.3%
15.98
Common law
0.601
1.000
0.490
0.752
1.000
0.432
−20.1%
−11.89
Ownership concentration
0.257
0.150
0.163
0.197
0.120
0.134
30.3%
53.97
Disclosure regulation
0.753
0.833
0.184
0.870
1.000
0.181
−13.3%
−20.84
Aggregate earnings management
10.211
7.000
7.168
6.589
2.000
6.767
55.0%
2.21
Variable
Mean
F. Country characteristics (Acquirer)
(N = 880)
Median
(N = 13,716)
S.D.
Mean
Median
S.D.
% diff.
t
G. Country characteristics (Target)
Lower-quality disclosure regulation
0.793
1.000
0.405
0.862
1.000
0.344
−8.0%
36.02
More aggregate earnings management
0.260
0.000
0.439
0.152
0.000
0.359
71.8%
47.49
47
Table 3
Type of financial advisor chosen by the acquirer: audit-frim vs. investment-bank advisor
The table shows the results of the logit regression analysis of advisor choice by the acquirer. The dependent
variable AF advisor takes the value of 1 if the acquirer has chosen an accounting firm advisor in the M&A deal, and 0
otherwise. The explanatory variables are defined in table 1. ln denotes the logarithm value of a variable and N is the
number of observations. p(Wald Χ2) is the p-value of the Wald Χ2-test for model specification. Pseudo R2 is the
pseudo R-squared. All the models are pooled cross-sectional models with clustered standard errors robust to within
acquirer and year correlation (Rogers 1993) and heteroskedasticity-adjusted (White 1980).
(1)
(2)
(3)
(4)
Baseline
Deal financing
Past relation
Country
characteristics
Estimate
p
Estimate
p
Estimate
p
Estimate
p
−1.470
0.000
−1.460
0.000
−1.446
0.000
−0.737
0.198
0.276
0.031
0.279
0.029
0.282
0.033
0.310
0.025
1.067
−0.955
0.434
−0.530
0.000
0.000
0.000
0.000
1.073
−0.952
0.433
−0.523
−0.141
0.007
0.000
0.000
0.000
0.000
0.190
0.948
1.075
−0.937
0.425
−0.524
−0.124
0.017
0.000
0.000
0.000
0.000
0.244
0.877
1.047
−0.910
0.232
−0.533
−0.109
0.023
0.000
0.000
0.166
0.000
0.309
0.789
0.005
0.946
0.008
0.920
0.002
0.972
0.005
0.000
0.000
0.780
0.789
0.000
0.521
0.289
0.189
0.997
−0.282
0.011
0.282
−1.016
−0.061
−0.195
−0.598
0.033
−0.060
0.108
0.007
0.030
0.006
0.000
0.000
0.700
0.772
0.000
0.332
0.314
0.146
0.984
−0.281
0.011
0.280
−0.486
−0.046
−0.170
−0.600
0.032
−0.059
0.117
−0.059
0.034
0.003
0.000
0.008
0.799
0.801
0.000
0.395
0.333
0.109
0.854
0.832
0.000
Ownership concentration
−0.567
0.475
Disclosure regulation
-2.068
0.001
0.048
0.012
0.236
0.075
Intercept
Target in high |Total Accruals|
industry
Unlisted target
US target
Cross-border
ln Deal value
Financing required
Cash offering
Number of considerations
offered
Returning acquirer advisor
Percentage of shares sought
Number of acquirer advisors
US acquirer
IB presence in target country
Family owned target
SOX
ln Acquirer size (USD)
ln Acquirer B/M
Acquirer stock momentum
Acquirer stock volatility
0.011
0.265
−0.988
−0.047
−0.158
−0.595
0.028
−0.054
0.102
0.005
0.005
0.001
0.000
0.758
0.810
0.000
0.401
0.346
0.196
0.988
0.011
0.271
−0.999
−0.043
−0.176
−0.593
0.022
−0.061
0.103
0.001
Country characteristics (Acquirer):
Common law
Aggregate earnings management
Country characteristics (Target):
Lower-quality disclosure regulation
Yes
Yes
-0.171
0.268
Yes
N
14,596
14,596
14,596
14,596
p(Wald X2)
Pseudo R2
0.000
0.000
0.000
0.000
23.66%
23.69%
23.86%
24.49%
More aggregate earnings management
Yes
Year and industry effects
48
Table 4
Acquirer announcement-period CAR
Panel A of this table reports the average acquirer CARs partitioned by the accounting firm and investment bank
advised deals. Panel B shows the regression analysis of acquirer announcement returns. The dependent variable is the
acquirer CAR calculated for the five days (-2, 2) around the announcement (day 0) of an acquisition deal, adjusted for
the market return based on the stock market index of the acquirer's country of incorporation. Acquirer firm controls
are the log values of the acquirer size and B/M, the acquirer stock momentum and volatility, and the US acquirer
dummy. Acquirer country controls are the country characteristics for the acquirer defined in table 1. The other
explanatory variables are also defined in table 1. ln denotes the logarithm value of a variable and N is the number of
observations. F is the F-statistic for the model specification and p(F) is the corresponding p-value. R2 is the Rsquared. Model 3 is based on the paired sample matched by the propensity score estimated with Model 3 in table 3.
All the models are pooled cross-sectional models with clustered standard errors robust to within acquirer and year
correlation (Rogers 1993) and heteroskedasticity-adjusted (White 1980).
N
Mean
S.D.
t
Panel A: Descriptive statistics
Full sample:
Accounting firm advisor
830
Investment bank advisor
13,087
% diff.
2.03%
0.28%
0.68%
0.08%
198.1%
0.29%
7.220
8.880
678.2
Propensity score matched sample:
Accounting firm advisor
830
2.03%
0.28%
7.220
Investment bank advisor
830
1.10%
0.25%
4.340
% diff.
Panel B: Regression results
84.9%
(1)
Baseline
Estimate
Intercept
AF advisor
AF advisor with industry expertise on
accounting
AF advisor with industry expertise on
accounting
× Target in high |Total Accruals| industry
Target in high |Total Accruals| industry
Cash offering
Returning acquirer advisor
ln Deal value
Number of acquirer advisors
Cross-border
Family owned target
SOX
Acquirer firm controls
Acquirer country controls
Year effects
Industry effects
N
p(F)
R2
0.053
0.007
0.009
−0.002
0.000
−0.001
0.004
−0.011
0.000
Yes
Yes
Yes
Yes
13,917
0.000
2.96%
0.38%
(2)
Full model
223.8
(3)
Propensity score
matched sample
Estimate
p
p
Estimate
p
0.000
0.025
0.072
0.006
0.000
0.075
0.103
0.001
0.010
0.012
−0.002
0.811
−0.004
0.519
0.019
−0.004
0.010
−0.002
0.000
−0.001
0.004
−0.012
0.000
Yes
Yes
Yes
Yes
13,917
0.000
3.10%
0.085
0.306
0.000
0.328
0.650
0.453
0.205
0.246
0.954
0.032
−0.015
−0.004
0.004
0.005
−0.004
−0.002
−0.020
−0.040
Yes
Yes
Yes
Yes
1,660
0.000
6.96%
0.022
0.056
0.437
0.419
0.018
0.267
0.650
0.223
0.068
0.000
0.267
0.829
0.627
0.031
0.296
0.990
49
Table 5
Offer premium
Panel A of this table reports the average offer premium partitioned by the type of advisor. Panel B shows the
regression analysis of offer premium. The dependent variable is the offer premium defined as (the ratio of the bid
price per share to the target’s closing stock price 4 weeks prior to announcement – 1) × 100. The bid price is the
winning bid in a successfully completed takeover or otherwise the last withdrawn bid in an unsuccessful takeover.
Acquirer firm controls are the log values of the acquirer size and B/M, the acquirer stock momentum and volatility,
and the US acquirer dummy. Acquirer country controls are the country characteristics for the acquirer defined in table
1. The other explanatory variables are also defined in table 1. ln denotes the logarithm value of a variable and N is the
number of observations. F is the F-statistic for the model specification and p(F) is the corresponding p-value. R2 is
the R-squared. Model 3 uses IV estimation to control for the endogeneity of the AF acquirer advisor variable. All the
models are pooled cross-sectional models with clustered standard errors robust to within acquirer and year correlation
(Rogers 1993) and heteroskedasticity-adjusted (White 1980).
Panel A: Descriptive
N
Mean
S.D.
t
statistics
Full sample:
Accounting firm advisor
84
22.3%
2.8%
8.1
Investment bank advisor
5,316
29.7%
0.4%
72.8
% diff.
−24.7%
2.8%
−8.9
(1)
(2)
(3)
Panel B: Regression results
Industry expertise
Baseline
2SLS
on accounting
Estimate
p
Estimate
p
Estimate
p
Intercept
AF advisor
AF advisor with industry expertise on
accounting
AF advisor with industry expertise on
accounting
× Target in high |Total Accruals| industry
Target in high |Total Accruals| industry
Unlisted target
Returning acquirer advisor
ln Last year's total deal value of acquirer
advisors
Financing required
Family owned target
ln Deal value
Number of acquirer advisors
Acquirer firm controls
Acquirer country controls
Year effects
Industry effects
N
p(F)
R2
0.306
−0.053
0.061
−0.157
0.007
−0.004
0.028
−0.032
0.000
−0.023
Yes
Yes
Yes
Yes
5,400
0.000
7.57%
0.000
0.066
0.039
0.000
0.514
0.033
0.029
0.759
0.988
0.000
0.304
−0.046
0.000
0.162
−0.023
0.696
−0.113
0.057
0.062
−0.156
0.007
0.036
0.000
0.514
−0.004
0.028
−0.032
0.000
−0.023
Yes
Yes
Yes
Yes
5,400
0.000
7.57%
0.033
0.028
0.760
0.987
0.000
0.310
−0.087
0.000
0.088
0.062
−0.157
0.007
0.006
0.000
0.408
−0.004
0.028
−0.033
0.000
−0.023
Yes
Yes
Yes
Yes
5,400
0.000
7.55%
0.028
0.003
0.633
0.946
0.000
50
Table 6
Deal completion rate
Panel A of this table reports the frequency of withdrawn deals partitioned by the advisor type for the full sample
and the PSM sample. Panel B shows the logit regression analysis of deal withdrawal. The dependent variable
Withdrawn takes the value of 1 if the deal offer is withdrawn by the acquirer and 0 otherwise. Acquirer firm
controls are the log values of the acquirer size and B/M, the acquirer stock momentum and volatility, and the US
acquirer dummy. Acquirer country controls are the country characteristics for the acquirer defined in table 1. The
other explanatory variables are also defined in table 1. ln denotes the logarithm value of a variable and N is the
number of observations. p(Wald Χ2) is the p-value of the Wald Χ2-test for model specification. Pseudo R2 is the
pseudo R-squared. Model 2 is based on the paired sample matched by the propensity score estimated with Model 3
in table 3. All the models are pooled cross-sectional models with clustered standard errors robust to within
acquirer and year correlation (Rogers 1993) and heteroskedasticity-adjusted (White 1980).
Panel A: Descriptive
N
Mean
S.D.
t
statistics
Full sample:
Accounting firm advisor
880
0.11%
0.11%
1.0
Investment bank advisor
13,716
7.01%
0.22%
32.2
0.25%
−400.2
−98.4%
% diff.
Propensity score matched
sample:
Accounting firm advisor
880
0.11%
0.11%
1.0
Investment bank advisor
880
1.48%
0.41%
3.6
0.42%
−218.5
−92.3%
(1)
Full sample
% diff.
Panel B: Regression results
Intercept
AF advisor
Target in high |Total Accruals| industry
Unlisted target
Returning acquirer advisor
ln Last year's total deal value of
acquirer advisors
Family owned target
ln Deal value
Number of acquirer advisors
Acquirer firm controls
Acquirer country controls
Year effects
Industry effects
N
p(Wald X2)
Pseudo R2
(2)
Propensity score matched sample
Estimate
−1.802
−3.234
−0.327
−1.413
−0.051
0.016
p
0.023
0.001
0.321
0.000
0.657
0.297
−0.490
0.418
0.043
Yes
Yes
Yes
Yes
14,596
0.000
0.467
0.000
0.378
15.83%
Estimate
−3.510
−2.731
p
0.280
0.000
−1.647
−0.279
0.044
0.000
0.672
0.677
0.738
−1.151
Yes
Yes
No
No
1,760
0.000
0.004
0.286
24.53%
51
Table 7
Repeated use of accounting firm advisors by acquirers
Panel A of this table reports the frequency of deals advised by accounting firms and by investment banks,
conditional on the bidder using an accounting firm advisor previously. Panel B shows the results of the logit
regression for the expanded advisor choice analysis. The dependent variable AF advisor takes the value of 1 if the
acquirer has chosen an accounting firm advisor in the M&A deal, and 0 otherwise. Deal controls are all the dealrelated variables included in table 3. Acquirer firm controls are the log values of the acquirer size and B/M, the
acquirer stock momentum and volatility, and the US acquirer dummy. Acquirer country controls are the country
characteristics for the acquirer defined in table 1. The other explanatory variables are also defined in table 1. ln
denotes the logarithm value of a variable and N is the number of observations. p(Wald Χ2) is the p-value of the
Wald Χ2-test for model specification. Pseudo R2 is the pseudo R-squared. All the models are pooled cross-sectional
models with clustered standard errors robust to within acquirer and year correlation (Rogers 1993) and
heteroskedasticity-adjusted (White 1980).
N
Mean
S.D.
t
Panel A: Descriptive statistics
Conditional on Prior experience using
AF advisor = 1:
Accounting firm advisor
880
31.3%
1.56%
20.0
Investment bank advisor
13,716
% diff.
Panel B: Regression results
Estimate
Intercept
Prior experience using AF advisor
Returning acquirer advisor
Deal controls
Acquirer firm controls
Acquirer country controls
Year effects
Industry effects
N
p(Wald X2)
Pseudo R2
10.0%
0.26%
39.1
211.5%
1.58%
133.5
(1)
(2)
Baseline
Returning acquirer advisor
p
Estimate
p
0.259
0.000
−0.723
0.997
0.205
0.000
−0.475
Yes
Yes
Yes
Yes
Yes
14,596
0.000
0.000
Yes
Yes
Yes
Yes
Yes
14,596
0.000
25.61%
25.50%
−0.628
0.880
52