Can Auditors Mitigate Information Asymmetry in M&As? An Empirical Analysis of the Method of Payment in Belgian Transactions

This paper empirically studies the relationship between audit quality and the method of payment in a sample of Belgian M&As between listed as well as private firms during 1997-2009. We investigate whether a high-quality audit reduces the need for contingent payments resulting from information asymmetry about the target’s value. In addition, we analyse whether large audit companies limit incentives for bidders to exploit private information on their own value. Using multivariate binary and ordered probit regression models, our results show a lower necessity for contingent payments in M&As where the target is audited by a BigN audit firm, after controlling for several other deal and firm characteristics. Furthermore, we find that the incentive for acquirers to use stock payments in periods of stock market overvaluation is mitigated by a high-quality external audit. Yet, the latter finding does not hold for a sample of privately-held acquirers