The Impact of the Market for Corporate Control on Audit Fees: Evidence from International M&A Laws

This paper investigates whether and how external governance from the market for corporate control affects audit pricing in a cross-country setting. We exploit the staggered enactments of international M&A laws as an exogenous shock that increases takeover pressure substantially. Using a difference-indifferences design, we find that audit fees decrease significantly after the passage of M&A laws. This is because the external governance strengthened by the takeover law enactments reduces the ex-ante agency risk perceived by auditors and shareholders, which in turn decreases clients’ misstatement risk and auditor litigation risk and thus reduces audit fees. We find that the disciplinary effect of M&A laws is more pronounced in countries with more intensive takeover activities and in clients with high agency costs. We further find that Big 4 premium is significantly reduced after the passage of M&A laws. These findings help us better understand the interactive role of the market for corporate control and external auditing in shaping the corporate governance mosaic.