PCAOB International Inspections and Merger and Acquisition outcomes

In this study, we examine how Public Company Accounting Oversight Board (PCAOB) international inspections on non-U.S. auditors affect international Merger and Acquisition (M&A) outcomes. Using a difference-in-differences research design, we find that following the PCAOB inspections, clients of inspected auditors are more likely to become acquisition targets and if they become targets, the likelihood of deal completion increases. Acquirers also pay higher premiums to targets with PCAOB-inspected auditors, and the deal quality is higher for M&As involving targets with PCAOB-inspected auditors than those with non-inspected auditors. The effect of PCAOB inspections on M&A outcomes is more pronounced for targets with greater information risk and for those located in countries with weaker legal institutions. Collectively, our results suggest that PCAOB inspections improve the credibility of audited financial statements, reduce information risk in M&A deals, and enhance capital allocation in global markets. Our study provides novel evidence on the real economic benefits of the PCAOB international inspection program.