Strategic alliances and shared auditors

Abstract

Strategic alliances are voluntary corporate arrangements for mutual benefit. Although alliances are common as an alternative to M&As, they require cooperation between alliance partners who continue to operate as independent companies. Thus, relational risk—the probability and consequences of unsatisfactory cooperation or opportunistic behavior—is inherent in alliances and a major determinant of alliance success. In this paper, we examine and find that alliance announcement CARs are higher for companies sharing the same auditor with their alliance partner. Further, our findings suggest that the shared auditor effect is stronger for alliances where potential relational risk between alliance partners is greater. Our findings hold when we use “withdrawn” (i.e., the withdrawal of an announced alliance before its start date) as an alternative, albeit inverse, measure of alliance success. Collectively, we provide novel evidence which suggests that auditors add shareholder value by playing a matchmaking role in alliance formation, building inter-company trust and mitigating relational risk by facilitating the sharing of non-financial information between potential alliance partners among their audit clients.