How Accounting Firms Compete for Financial Advisory Roles in the M&A Market

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)