Clients’ Stock Price Reactions to the Accounting Firm Mergers in the United States

To investigate the stock price reactions of clients to the KPMG, Ernst & Young, and Deloitte & Touche mergers in the United States, this study adopts the event study methodology proposed by Chandra and Balachandran (1990) a portfolio return in order to conduct a time series analysis. In addition, this study uses a cross-sectional analysis to examine whether the stock price reactions of clients to the mergers are consistent with agency theory and the insurance hypothesis. The results demonstrate that most of the stock price reactions of clients to each merger are not significantly positive until the merger is almost certain. Based on the cross-sectional analysis, the results show that the stock price reactions of larger clients are more significantly positive only for the KPMG merger. The findings imply that only the KPMG merger resulted in increasing the value of the firm for the clients due to better audit quality. However, clients’ financial conditions are negatively associated with clients’ stock price reactions to each merger, which is consistent with the insurance hypothesis. The findings suggest that financially distressed clients benefit more from the mergers of their accounting firms.