We examine how acquirers’ political connections affect takeover bargaining that involves significant regulatory uncertainties, when the target’s options of putting itself to another bidder are ...restricted. Opposite to prior takeover theories, we show that a politically connected acquirer pays a lower (rather than higher) takeover premium to and shares a smaller portion of the takeover gains with the target in the context of antitrust reviews, consistent with a bargaining benefit for the connected acquirer. Corroborating this bargaining argument, we find that the results are more pronounced in situations where: (1) the antitrust concerns are more severe; (2) the targets have fewer outside options other than the connected acquirers; and (3) the acquirers’ political connections are more valuable. Our results highlight the value of political connections to shareholders in takeovers, affecting not only the likelihood of completion but also the bargaining outcomes of the deal under the shadow of costly regulation.
We examine the relationship between investment banks' initial public offering (IPO) market shares and their prior IPO underpricing in the new IPO market for China-based companies on the Hong Kong ...Stock Exchange. To gain expertise in Chinese business practices, investment banks have the incentive to obtain business in this new IPO market by providing high offer prices to the issuer, leading to less underpricing and less money on the table. We hypothesize and find that the less an investment bank underprices China-based company IPOs, the greater its subsequent market share of China-based company IPOs in the Hong Kong Stock Exchange. Furthermore, this relationship is driven by a bank's initial China-based company IPO deals. These results suggest that in new IPO markets, investment banks' initial market shares, obtained through lower underpricing, help them grow their market shares in later periods, possibly through the expertise gained in the initial business.
This paper was accepted by Mary Barth, accounting
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Prior studies suggest that auditors with short tenure are associated with lower earnings quality because of the lack of client-specific knowledge and/or low balling. In this study, we examine whether ...industry specialization of auditors and low balling affect the association between auditor tenure and earnings quality. We find that the association between shorter auditor tenure and lower earnings quality is weaker for firms audited by industry specialists compared to non-specialists. In addition, we do not find results consistent with the low balling explanation.
•We show high search intensity of SEC filings is associated with heightened crash risk.•This result points to capital market pressures that induces myopic bad news hoarding.•Intense capital market ...attention may create unintended consequences.
We posit that high search intensity on a firm's SEC filings creates capital market pressure on managers to withhold bad news. Using the count of non-robot EDGAR downloads of SEC filings as a proxy for search intensity, we find that high search intensity is related to higher future crash risk. The result is cross-sectionally stronger for firms with higher transient institutional holdings, overconfident CEOs, and more intangibles. Our findings are robust to different measures of crash risk and bad news hoarding. Overall, we highlight one unintended capital market consequence associated with the high intensity of information acquisition.
SUMMARY We analyze a unique incentive motivating audit partners to pursue new revenue streams from potential audit clients related to incumbent clients. In auditing clients belonging to business ...groups, a partner who issues a modified audit opinion (MAO) to a group-affiliated client risks losing not only that client but also the opportunity to extend their audit services to other member companies. We document that partners are less likely to render MAOs to group-affiliated clients when other group members are large relative to the partners’ client portfolio, and this relation intensifies when the incumbent group-affiliated clients themselves are economically less important. We also find that partners who issue MAOs to group-affiliated clients underperform in attracting new clients from the same business group. Further, investors perceive that audit quality is higher in these partners’ non-group-affiliated clients, reflecting that reputation protection forces discipline partners to resist the temptation to issue unwarranted clean opinions. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M42.
SYNOPSIS We show that a firm’s likelihood of appointing auditors with industry expertise or with a larger office increases after the firm is affected by an exogenous reduction in analyst coverage, ...relative to its matched control firms. This effect is stronger for affected firms with greater reductions in analyst monitoring, for smaller or younger firms, for firms with lower institutional or CEO ownership, and when the lost analysts are more effective monitors. We further show that affected firms that switch to high-quality auditors receive more positive market reaction, experience a smaller decrease in stock liquidity and a smaller increase in cost of equity capital relative to other affected firms, suggesting that audit quality has real payoffs. These results collectively provide causal evidence supporting the agency incentive driven demand for high-quality external auditing.
We examine the effects of city-level auditor industry specialization and scale economies on audit pricing in the United States. Using a sample of Big N clients for the 2000–2007 period, and a scale ...measure based on percentile rankings of the number of audit clients at the city-industry level, we document significant specialization premiums and scale discounts in both the pre- and post-Sarbanes-Oxley Act (SOX) periods. However, the effects of industry specialization and scale economies on audit pricing are highly interactive. The negative effect of city-industry scale on audit fees obtains only for clients of specialist auditors. By contrast, clients of non-specialist auditors obtain scale discounts only when they enjoy strong bargaining power, suggesting that auditors are "forced" to pass on scale economies to clients with greater bargaining power.
We examine whether the Public Company Accounting Oversight Board (PCAOB) international inspection program improves audit quality for a sample of non-US-listed foreign public client companies from 55 ...countries audited by foreign (i.e., non-US) auditors. For a sample of non-US-listed clients of PCAOB-registered foreign auditors, we find that initial PCAOB inspections improve audit quality, over and above the threat of such inspections, for foreign auditors’ non-US-listed foreign clients. Our findings document the benefits of PCAOB international inspections for foreign investors in non-US-listed foreign companies which could increase the acceptability of the PCAOB international inspection program abroad.
