Expert reports in Australian takeovers: fees and quality

Target firms in Australian takeovers are required to commission the preparation of an independent expert report in circumstances where there is a perceived conflict of interest with the bidder. As approximately half of these reports are prepared by firms with which the target has other business dealings, concern has been expressed over the quality of these reports due to the suggestion that such reports are provided at lower fees. We examine the 191 independent expert reports provided in all 649 Australian takeover bids initiated in the period 1990 to 2000 inclusive. Using an expert-fee model, we find that the fees for reports by experts with other business dealings with the target are not lower than those of unrelated experts. In addition, the results indicate that experts with other dealings with the target provide reports with a significantly smaller valuation range, consistent with these reports being of higher, rather than lower, quality. Our findings are inconsistent with the U.S. and New Zealand experience of prohibiting audit firms from providing valuation advice in takeovers.     

Termination Fees in Mergers and Acquisitions: Protecting Investors or Managers?

Abstract:  Institutional investors closely monitor termination fees in mergers and acquisitions (M&A). We argue that their magnitude reflects either agency problems or efficiency considerations. Focusing on M&A involving Canadian targets between 1997 and 2004, we assess the determinants and market impact of termination fees. Our findings show that the Thomson's SDC Platinum™ Worldwide Mergers & Acquisitions Database underestimates their extent. Results suggest that termination fees are essentially an efficient mechanism as they are relatively higher in M&A with high merger costs, a cash component and expected operating synergies. Stock market returns surrounding the deal announcement do not differ across levels of relative termination fees.     

An analysis of advisor choice, fees, and effort in mergers and acquisitions

This paper investigates the choice of financial advisors in mergers and acquisitions, the fees that the targets and the acquiring firms pay to these advisors, and the speed with which advisors complete transactions. Our sample includes 5337 merger deals announced during the period January 1995 to June 2000, that involved publicly traded targets and acquirers. We find that top-tier advisors are more likely to complete deals and to complete them in less time than lower tier advisors. However, the synergistic gains realized by the acquirers declined when top advisors were used. We also find that contingent fees play a significant role in expediting the deal completion. Surprisingly, we find that deals that are initiated by the advisors do not seem to take less time to complete. Our results suggest that the payment of larger advisory fees do not play an important role in determining the likelihood of completing the deal, but they are associated with greater acquisition gains realized by the acquirer. In addition, these synergistic gains are also associated with the switching by acquirers of their financial advisors within the same tier.     

Audit and non-audit fees and capital market perceptions of auditor independence

This study provides evidence on whether auditor independence-in-appearance, proxied by earnings response coefficients, is related to the non-audit fee ratio (non-audit to total fees from a client) or client importance (total fees from a client as a percentage of the total revenues of the audit firm). The results from large samples over the period 2001–2006 show, contrary to popular belief and the findings of some prior studies, that there is no evidence of a relation between perceived auditor independence and the non-audit fee ratio. However, perceived auditor independence is negatively associated with client importance, consistent with the economic theory of auditing. Our paper adds to the literature by examining the relative importance of non-audit fee ratios and client importance as determinants of independence-in-appearance.     

Workforce environment and audit fees: International evidence

Using a dataset from 30 countries over the period from 2002 to 2017, we examine the effects of auditing clients’ workforce environment on audit fees as well as the role that national labor market flexibility plays in this relationship. We find evidence that audit fees are significantly lower for firms with a good workforce environment, suggesting that auditors perceive such clients as less risky; as a result, auditors expend less effort and/or charge a lower risk premium. Furthermore, we find this effect to be stronger for firms in countries with a more flexible labor market. Our mediation test results indicate that the relationship between the audit client workforce environment and audit fees is mediated by media coverage of workforce controversies. Our study contributes to the international audit fee literature by identifying employee welfare as a distinct audit pricing factor, above and beyond the effects of overall corporate social responsibility practices.     

Independent director reputation incentives,accruals quality and audit fees

While prior research provides abundant evidence that independent directors are associated with favorable outcomes, researchers have only recently started to investigate the impact of independent director reputation incentives. This study examines whether the reputation incentives of independent directors are associated with accruals quality and audit fees. The results reveal a negative relationship between the proportion of independent directors with relatively low reputation incentives and accruals quality. Further, the proportion of independent directors with relatively low reputation incentives is positively associated with audit fees, suggesting that auditors view lower reputation incentives as increasing risk. We also find that Big 4/5 auditor office size moderates the relationship between independent director reputation incentives and audit fees. Specifically, our results indicate that audit fees increase less in response to lower reputation incentives as office size increases, suggesting that larger offices respond to the risks associated with lower reputation incentives more efficiently than smaller offices.     

Effect of regulatory oversight on the association between internal governance characteristics and audit fees

We examine the relationship between internal governance, external audit monitoring and regulatory oversight for a sample comprising industrial companies and financial/utility companies subject to additional industry‐specific regulation. Our results indicate that the association between audit fees and board/audit committee independence and size are weaker for regulated companies. These observations are consistent with the notion that regulatory oversight partially substitutes the external audit as a monitoring mechanism. However, boards/audit committees with more multiple directorships demand a more extensive audit in the presence of regulatory oversight to protect their reputation capital. Our study enhances our understanding of the complex relationships among the major corporate governance elements.     

Independent audit committee members’ board tenure and audit fees

An independent audit committee is an audit committee on which all members are independent directors. This study examines whether independent audit committee members’ board tenure affects audit fees. On the basis of the prior literature, we formulate an unsigned hypothesis. This is because on the one hand, long board tenure audit committee members (defined as members with board tenure of 10 or more years) have greater incentives to protect their reputational capitals by purchasing increased audit effort, which positively affects audit fees. On the other hand, audit pricing reflects audit committee quality. Long board tenure audit committee members may have less need for increased audit effort because they can effectively oversee the financial reporting process themselves, which negatively affects audit fees. We find that audit fees are negatively associated with the proportion of long board tenure directors on the independent audit committee, consistent with the notion that audit committee members’ long board tenure results in lower audit effort.     

Female audit committee members and their influence on audit fees

We test the relationship between female representation on the audit committee and audit fees for 624 Australian companies in the year 2011. A positive relationship is found, leading to the conclusion that female presence on audit committees influences the quality of the external audit. Further, we find that gender is the significant audit committee characteristic in predicting audit quality and that women on the audit committee strengthen the positive relationship between firm size and audit fees, and between risk and audit fees. Conversely, we find that female representation dampens the positive relationship between complexity and audit fees.     

The impact of audit committee expertise on audit quality: Evidence from UK audit fees

Governance regulators currently place great emphasis on ensuring the presence of financial expertise on audit committees (Sarbanes-Oxley, 2002; UK Corporate Governance Code 2010–2016). Underlying this is a belief that greater expertise enhances the effectiveness of audit committees and, by extension, the quality of the external audit. This study investigates the impact of audit committee expertise on one measure of audit quality - audit fees paid by FTSE350 companies. Our analysis finds that audit committees possessing greater levels of financial expertise are associated with higher audit fees. When we segregate financial expertise between accounting and non-accounting, we find that the positive impact identified is driven by non-accounting expertise. Furthermore, when we separate FTSE100 and FTSE250 firms we find the impact of financial expertise is confined to FTSE250 firms. Our findings are important as they highlight the usefulness of segregating financial expertise between specialists and non-specialists, something which regulators in the UK and in the USA currently do not do. Our findings also highlight the potential value of audit committee expertise in smaller as opposed to larger listed firms, suggesting that the value of expertise to audit quality depends on the specific financial reporting challenges firms face.     

Female tainted directors,financial reporting quality and audit fees

This paper examines the association between the presence of female tainted directors on corporate boards and audit committees and (1) financial reporting quality and (2) audit fees. Female tainted directors are defined as female directors who have been directors of the firms that have previously been involved in financial failures and integrity indiscretions. Using real earnings management and audit fees as proxies for effective governance and board reputation, we find that firms with female tainted directors have higher real earnings management and higher audit fees. However, since prior literature has demonstrated that audit fees are higher for firms with female directors because female directors demand better auditing, we corroborate a supply-side effect of auditors charging higher audit fees when female tainted directors exist. We demonstrate this by showing that while there is an association between audit fee and real earnings management, this association is higher for firms with female tainted directors. Arguably, the governance and reputational benefits of female directors on boards are negated if such directors have tarnished professional reputations.     

Underwriting relationships: Information production costs, underwriting fees, and first mover advantage

We study underwriting relationships in the floating rate debt market, where many issuers have a large number of offerings. We find that frequent issuers maintain close relationship with only three to five underwriters and pay significantly less underwriting fees than infrequent issuers. The findings are consistent with the notion that starting an underwriting relationship requires expenses for information production. We also find that an issuer’s first underwriter has a cost advantage over later-comers in competing for the issuer’s business. As a result, the first underwriter wins a larger share of the issuer’s business. JEL Classification G21 · G24     

Unintended costs of a dual regulatory environment: Evidence from state-level cannabis legalization and bank audit fees

Since 2014, a number of U.S. states have legalized business activities related to the production, distribution, and use of recreational cannabis. These activities remain illegal at the U.S. federal level, creating a dual regulatory environment. The uncertainty related to the enforcement of federal cannabis laws affects businesses located in legalizing states, particularly federally-insured banks. Applying a difference-in-differences approach to a matched sample of banks in legalizing and non-legalizing states, we document an increase in audit fees incurred by banks located in legalizing states after cannabis legalization. This finding is consistent with increased auditor effort and engagement risk being an unintended consequence of state-level recreational cannabis legalization. In supplemental analysis, we find that the relation between banks’ audit fees and cannabis legalization was greater for banks having larger increases in banking activity, suggesting that audit fees increased primarily for banks that may be engaging in relationships with cannabis-related businesses.     

The pricing of audit and non-audit services in a regulated environment: a longitudinal study of the UK life insurance industry

This paper studies the relationship between audit and non-audit service fees paid to the statutory auditor by UK life insurance firms, utilising an extensive panel-data sample set for the period 1999–2009. Consistent with a knowledge spillover (impairment of independence) hypothesis, we predict and find that audit fees are positively (negatively) associated with actuarial (tax service) fees. Additionally, our results indicate that regulatory changes enforced after 2004 deterred UK life insurance firms from purchasing non-audit services that are perceived to impair auditor independence. Finally, we find evidence concerning the inter-temporal determination of audit fees.     

On the persistence and dynamics of Big 4 real audit fees: Evidence from the UK

Despite the huge audit pricing literature, there is a dearth of evidence on the temporal dynamics of audit fee adjustments and the persistence of audit fees. Based on a sample of 76,867 panel observations for a sample of UK companies audited by the Big 4 over the period 1998 to 2012, we employ consistent lagged dependent variable panel estimators to provide new evidence on the persistence and dynamics of real Big 4 audit fees. Contrary to extant research, which assumes that audit fees adjust immediately in a single period, our empirical results indicate that Big 4 real audit fees are persistent, being partly dependent on their previous realisations. We conclude that static audit fee models omit a potentially important temporal dimension of audit pricing behaviour and that further research is warranted into dynamic audit fee models across other jurisdictions.     

The impact of target firm financial distress in Australian takeovers

Of the motives that have been advanced to explain corporate acquisitions, the least explored is the acquisition of a target experiencing financial distress. This study addresses this void by examining whether target firm financial distress is related to takeover: attitude, premiums, payment method, competition and outcome. Despite inconsistent findings across our distress measures the tenor of the results suggest that distressed targets receive higher premiums and are less likely to be offered cash consideration. Additionally, takeover completion is lower and takeover competition higher for targets in financial distress. Financial distress does not influence whether a takeover is hostile or friendly.     

Choice of acquisition form in Australia and the post‐takeover employment of target firm directors on the acquiring firm board

In Australia, a corporate acquisition can be structured as either a scheme of arrangement or a takeover. We investigate the association between deal structure and the retention of target directors on the merged entity board. We find that the odds of a target director subsequently sitting on the merged entity's board are significantly higher in schemes. The results also show that premiums are lower in schemes of arrangement when additional target directors are appointed to the board of the acquiring firm. The findings indicate that target director appointment is unrelated to the merged entity's post‐acquisition performance.     

The erosion of jurisdiction: Auditing in a market value accounting regime

In recent years, accounting standards worldwide have been modified so as to render them more heavily based on fair or market value. This paper explores the behavioural and jurisdictional consequences of the normative drift towards fair value. Being informed by Giddens’ work on late modernity, trust and expertise and drawing on a series of interviews with Canadian professional accountants, we argue that fair value accounting makes it increasingly harder for auditors to feel and actually be in control of their own expertise. That is, auditors’ system of expertise is now considerably more reliant on a “secondary” – but perhaps in actual fact primary – layer of expertise revolving around market valuation techniques and principles. In so doing, the auditors’ job is increasingly transformed as the involvement of valuators now represents a recurrent and pervasive phenomenon in audit processes. The auditor's role nowadays resembles that of an arbiter having to mediate discrepancies over subjective values – a number of which being produced by highly specialized valuators. Important implications ensue from a system of expertise in which the experts’ degree of control over their own jurisdictional work is increasingly eroding.     

Switching due diligence auditor in Chinese mergers and acquisitions

The routine financial reporting auditor (FR auditor) of an acquiring firm has the advantage of knowing the acquirer very well, however, a large portion of acquirers in China do not use their FR auditor to continue serve as their due diligence auditor (DD auditor) in the takeover process. Using a sample of 818 takeover transactions from 2004 to 2014, we find that the acquiring firms are more likely to appoint a new DD auditor for M&A, instead of using the incumbent one, when the FR auditor is not an industry specialist and the acquiring firms’ financial reporting quality is low. For low financial reporting quality acquiring firms, changing to a new DD auditor can prevent negative market reactions when firms make the M&A announcement, but firms have to pay a higher premium. Our results remain robust when using alternative definitions of industry specialisation and measures of financial reporting quality.     

Why do Underwriters Charge Low Underwriting Fees for Initial Public Offerings in Taiwan?

Abstract:  In Taiwan, underwriting fees for initial public offerings (IPOs) are extremely low compared to fees in other countries. From 1989 to 1999, the average underwriting fee for IPOs in Taiwan is 0.99%—far below the regulatory limit. Although the Taiwanese underwriting industry is highly concentrated, underwriting fees do not cluster at any particular level. We examine the underwriting fee and income structure in Taiwan and find support for an incentive hypothesis. Underwriters have an incentive to charge lower underwriting fees when market demand for IPO shares increases and capital gains account for a larger portion of their total income.