Takeover premiums and the perception of auditor independence and reputation

Abstract

This study investigates if there is a positive association between takeover premiums and the bidder¿s perception of target firm auditor reputation and independence. Using auditor size as a proxy for auditor reputation, the results indicate that in hostile takeovers target shareholders receive a higher takeover premium when a Big 4 auditor audits the target firm prior to the takeover. This result is only significant, however, in the period prior to the highly publicised audit failures. The impact of perceived auditor independence on takeover premiums is studied using the levels and size of non-audit service (NAS) fees provided by the target firm auditor. Using three proxies for auditor independence, the results show no association between perceived auditor independence and takeover premiums. This finding is robust to partitioning the sample by auditor size, takeover hostility and splitting the sample into takeovers pre- and post- the corporate scandals that occurred in 2002.