Audit Office Labor Market Proximity and Audit Quality
joint with Gladys Lee and Vic Naiker
Forthcoming, The Accounting Review
This study examines whether the audit quality of Big 4 audit firms is affected by an audit office’s proximity to more target universities for appointing staff auditors. We identify these target universities using a recruitment map of a Big 4 audit firm and unique office-level hiring data hand-collected from LinkedIn. Our findings suggest that audit offices closer to more of their key feeder schools and universities with accredited business schools are associated with higher audit quality, as observed by a lower likelihood of financial accounting misstatements. Our results are robust across alternative measures of labor market proximity and audit quality, and to a battery of sensitivity tests, including controlling for client firm’s proximity to universities. Overall, our results suggest that audit offices benefit from being proximate to more key suppliers of staff auditors.
Stealth Acquisitions and Product Market Competition
joint with John D. Kepler and Vic Naiker (on SSRN)
This study examines the extent to which firms structure their merger and acquisition (M&A) deals to avoid scrutiny from antitrust regulators in order to better understand how certain corporate deals alter firms’ competitive landscapes. We find a large bunching of M&A deal values just below thresholds that trigger antitrust scrutiny, and that these “stealth acquisitions” are driven by acquisitions of private targets that entail contractual terms with lower deal premiums that facilitate avoidance of antitrust review, payoff functions that allow for more discretion in assigning deal values, and additional compensation for managers of target firms (e.g., via post-acquisition employment). Finally, we find several patterns of evidence consistent with stealth acquisitions reducing product market competition, as the equity values of acquiring firms’ competitors increase following stealth acquisitions, and detailed micro-level product pricing data reveals increased product prices following a stealth acquisition by rivals, but no increase in product prices following a similar acquisition that undergoes antitrust review. Our results suggest that firms can successfully manipulate M&A deals to avoid antitrust scrutiny, thereby leading to anticompetitive behavior.
Appraisal Risk and Corporate Disclosure During Mergers and Acquisitions
single-authored (on SSRN)
I exploit a 2007 court ruling that significantly strengthens appraisal rights for shareholders of Delaware-incorporated target firms to examine how managers respond to appraisal risk during takeovers. Appraisal rights give target shareholders the right to receive a judge’s determined value for their shares in lieu of the acquirer’s offer. Target-firm disclosures play a critical role in the valuation decisions of judges; and valuation decisions pose a substantial risk to acquirers. I find that heightened appraisal risk induces target managers to withhold positive news arriving between the announcement and effective completion of the takeover. This observation is driven by target managers who are aligned with acquirers. I further document that acquirers benefit from this behavior in the form of a lower likelihood of appraisal and a higher likelihood of positive post-acquisition returns. Overall, my findings suggest that acquirer-target manager ties play an important role in facilitating the dilution of target shareholder property rights.