The Value of Assurance Over Internal Controls: Evidence from Mergers and Acquisitions

In this study, I examine the value of assurance over internal controls in the mergers and acquisitions setting. Specifically, I examine the how the existence of an internal control audit mandated under Section 404(b) of SOX affects information asymmetry as proxied for by the likelihood of a company becoming the target of an acquisition. I find that companies with internal control audits are significantly more likely to receive bids than their counterparts that do not have an internal control audit. Upon further investigation, I find that the mechanism by which companies are more likely to become the target of an acquisition is the reduction in information asymmetry as the results are concentrated in the sample of companies with higher information asymmetry. I also provide some evidence that acquirers are able to reduce the length of transactional due diligence for targets with internal control audits. In additional analyses, I find that the reduction in information asymmetry attributable to internal control audits is significantly reduced when there are other intermediaries available to reduce information asymmetry for acquirers such as financial analysts, institutional owners, or larger auditors