Accounting Firms in the M&A Advisory Market

Abstract

Accounting firms list consistently among top M&A financial advisors in the Thomson Reuters, the Mergermarket Worldwide, and European league tables by deal count, and increasingly feature in rankings by deal value. We propose that bidders choose accounting firms to advise on transactions where the likelihood of overpaying for the target is high. For these transactions, accounting firms can lever on the industry expertise acquired from targets’ industries audits, which aids fairer target valuation. Consistently, we find that in terms of acquirer announcement returns and offer premia, transactions with hard-to-value targets are associated with higher M&A performance if the transactions are advised by accounting firms that are audit-specialists in the target’s industry. This effect is robust to endogeneity and various measures of valuation difficulty. Our findings highlight an important spillover effect from audit to non-audit functions and provide a new perspective for executives to evaluate their future M&A advisory choices.

Keywords: accounting firms, non-audit services, knowledge spillover, industry expertise, financial advisors, mergers and acquisitions

JEL Classification: G34, M41, M49