I analyze the effect of auditor choice on acquirers’ values around merger announcements and the factors affecting the interaction between auditor size and the market reaction to merger announcements. I find that acquirers audited by non-Big 4 accounting firms outperform those audited by Big 4 firms. This effect is more pronounced when the targets are privately held and when the likelihood of the auditors playing a prominent advisory role increases. While the largest auditing firms are usually assumed to offer superior services, the study suggests that smaller firms have a comparative advantage in assisting their clients in merger transactions.

Prior studies suggest that managers use their reporting discretion to signal private information. However, because managers are often assumed to use their discretion to mislead investors, discretionary accruals might be regarded as opportunistic. We posit that combining the accrual signal with other signals may be an effective means of communicating private information. One such signal is stock splits. The stock split signal lends credibility to the accrual signal whereas the accrual signal reinforces the split signal. Accordingly, we find that, at the split announcement, the market construes the pre-split abnormal accrual as a signal of managerial optimism rather than managerial opportunism.