Misvaluation of takeover targets and auditor quality (original) (raw)
Misvaluation may be a significant driver of the takeover market (Dong et al., 2006). Motivated by Titman and Trueman (1986) and Teoh and Wong (1993), we examine the role of auditor quality in the misvaluation of takeover targets. Given that firms audited by higher quality auditors (BigN) have higher financial statement quality, those target firms should be less undervalued than other target firms. We argue that this undervaluation that arises from information asymmetry between insiders and outsiders of the firm, is reduced in the takeover process as before making the takeover bid, the bidder is likely to analyse the prospects of a potential takeover target very closely. If BigN client firms are less undervalued prior the takeover than other target firms, there should be weaker market reaction to the takeover announcements when their true value is revealed to the market through the takeover announcement. Consistent with this, using the sample of over 1300 US takeover offers and their matched pairs from 1990 to 2005, we find that non-BigN targets are undervalued compared to non-target non-BigN client firms whereas we find no evidence suggesting that BigN targets are undervalued prior the takeover announcement. More importantly, our univariate and multivariate tests show that non-BigN targets provide larger cumulative abnormal returns than BigN targets, indicating a stronger market reaction to non-BigN takeover announcements. Consistent with the previous studies showing that BigN audited firms going public experience less underpricing compared to other IPO-firms, our findings suggest that those BigN client firms that become takeover targets, are less underpriced than their non-BigN counterparts.
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Misvaluation of and auditor quality takeover targets
2008
Misvaluation may be a significant driver of the takeover market (Dong et al., 2006). Motivated by Titman and Trueman (1986) and Teoh and Wong (1993), we examine the role of auditor quality in the misvaluation of takeover targets. Given that firms audited by higher quality auditors (BigN) have higher financial statement quality, those target firms should be less undervalued than other target firms. We argue that this undervaluation that arises from information asymmetry between insiders and outsiders of the firm, is reduced in the takeover process as before making the takeover bid, the bidder is likely to analyse the prospects of a potential takeover target very closely. If BigN client firms are less undervalued prior the takeover than other target firms, there should be weaker market reaction to the takeover announcements when their true value is revealed to the market through the takeover announcement. Consistent with this, using the sample of over 1300 US takeover offers and their matched pairs from 1990 to 2005, we find that non-BigN targets are undervalued compared to non-target non-BigN client firms whereas we find no evidence suggesting that BigN targets are undervalued prior the takeover announcement. More importantly, our univariate and multivariate tests show that non-BigN targets provide larger cumulative abnormal returns than BigN targets, indicating a stronger market reaction to non-BigN takeover announcements. Consistent with the previous studies showing that BigN audited firms going public experience less underpricing compared to other IPO-firms, our findings suggest that those BigN client firms that become takeover targets, are less underpriced than their non-BigN counterparts.
Valuation of takeover targets and auditor quality
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The Value of Big N Target Auditors in Corporate Takeovers
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