PCAOB International Inspections and Merger and Acquisitions
Yongtae Kim, Lixin (Nancy) Su, Gaoguang (Stephen) Zhou, Xindong (Kevin) Zhu
Published in Journal of Accounting and Economics, August 2020
A new paper by Xindong (Kevin) Zhu, Associate Professor in the Department of Accountancy and co-authors, examines the real economic effects of Public Company Accounting Oversight Board (PCAOB) oversight by analysing the effect of its international inspections on global acquisitions involving non-U.S.-listed foreign target firms.
Using data from 35 countries, Zhu and co-authors show that firms with inspected auditors are more likely to receive an acquisition bid, than those with uninspected auditors.
“We also find that deal completion is more likely and deal announcement returns are higher if deals involve targets with inspected auditors,” says Zhu.
Further, they find that audit deficiencies identified in inspections reports weaken the positive effect of PCAOB oversight on Merger and Acquisition (M&A) deals.
The study contributes to the literature in several ways. First, it adds to the debate on the value and effectiveness of the PCAOB international inspection program by showing the real economic benefits of such oversight in the global M&A market. Second, the study contributes to the literature that examines the effect of audit quality on M&A outcomes by supporting the assurance role of auditors in M&As. Third, it contributes to the literature that examines the real effect of auditing. Finally, it contributes to the debate on the effectiveness of public regulation in the international audit setting.
In sum, the study provides novel evidence on the real economic benefits of the PCAOB international inspection program, and strong support for the relation between audit quality and capital allocation efficiency. As such, the study is likely to be informative to regulators, investors, and other market participants across the globe.