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A new study from Bayes Business School (formerly Cass) shows accounting firms are leveraging their audit expertise to produce fairer target valuations on mergers and acquisitions (M&A) than investment banks.

“Accounting Firms in the European M&A Advisory Market” by Dr Pawel Bilinski, Finance Reader and Dr Andrew Yim, Accounting Lecturer at Bayes Business School (formerly Cass), shows the benefits of competence and experience in auditing accounting firms in assessing the fair value of transaction objectives.

Research highlights include:

  • Returns from acquirer announcements are higher when an agreement is negotiated with an accounting firm.
  • Bid premiums are lower if the bidder is advised by audit specialists with prior experience in the target industry.
  • Investment bank-advised bidders experience negative price reactions when attempting to buy hard-to-value targets.
  • Accounting firms’ more up-to-date knowledge of auditing practices generates higher returns for acquiring shareholders.

Since overpayment on objectives is one of the most common reasons for the failure of mergers and acquisitions, the study of transactions of 15 countries of the European Union between 1990 and 2014 is based on the theory of “knowledge-based view of resources”, which states that competitive advantage can be developed through firm-level knowledge as a strategic source.

Using the Securities Data Company (SDC) Platinum M&A database and the Compustat Global database, the research sampled 7,771 transactions by investment banks and 691 by accounting firms and their respective prices. Measuring accounting quality by the quality of accrued liabilities – which correlates with the accuracy of free cash flow valuation – the researchers then developed an index to measure target valuation difficulty based on whether the whether or not the target company was private, the size of the target, and whether or not the target was based in the United States.

Dr Bilinski said the research had many key contributions, adding to the knowledge-based view of resource-based theory.

“Our study documents the role of accounting firms in M&A advisory, which argues in favor of using their services over traditional investment banks in pursuing targeted acquisitions.”

“Accounting firms have excellent skills in determining the true value of a business through audit expertise, which is invaluable given the number of transactions that fail or fail due to overpayment.”

“With the growing preference for environmentally, social and governance (ESG) friendly transactions, there are new dimensions to assess the value of a target company. Audit expertise could help overcome this challenge additional.”

“Of course, investment banks are still widely used in M&A transactions and have their own merits, but we hope our study will shed light on the benefits of the accountancy profession and the positive role it can play. in target acquisition.

Dr Yim said it is in the interest of accounting firms to continue to provide high quality auditing and reporting services in order to be competitive in providing M&A advisory services.

“Our findings help policymakers and regulators appreciate the benefit of letting accounting firms develop different service lines,” he said. “The study adds to the list of pros and cons that should be rationally weighed in the debate over the separation of audit and advisory functions within accounting firms.”

“Our study also advances the knowledge-based perspective of organizations by explaining how knowledge spillovers from audit work can improve the quality of M&A advisory work, helping accounting firms establish a strong foothold in the market. specialty territory of investment banks.”

“Otherwise, it’s hard to understand why accounting firms are among the top ten M&A financial advisers in Europe’s Thomson Reuters and Mergermarket rankings.”

The research is published in the British Journal of Management.


Study finds that at least some audit expertise applies to all industry sectors


More information:
Pawel Bilinski et al, accounting firms in the European M&A advisory market, British Journal of Management (2021). DOI: 10.1111/1467-8551.12571

Provided by City University London

Quote: Accounting firms offer fairer value for mergers and acquisitions than investment banks, according to research (2022, February 23) retrieved April 27, 2022 from https://phys.org/news/2022-02- accounting-firms-make-my-investment.html

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