Do Acquirers Retain or Attract Customers Following Mergers and Acquisitions? Evidence from the Audit Industry

We use a unique setting of an auditor's acquisition of another auditor to provide new insight into customer responses to mergers broadly, and to study several audit market dynamics. Unlike most merger settings that primarily allow examination of the merging firms and their rivals, this setting also provides data on these firms' customers (“clients”). We find that the number of clients switching to the acquiring auditor increases following the merger, however we find that this is more than offset by an increase in the number of clients switching from the acquiring auditor. We find that a poor fit between the acquiring (large) auditor and the acquired clients leads to the loss of many (small) acquired clients. We also find evidence of unintended consequences to the acquiring firm in the form of the loss of existing clients. We find little evidence that the merger generates a sustained gain in market share or significant increase in aggregate fees. Our study is among the first to document the client attributes that lead to exit from a merged firm. Specific to the audit market, our study casts doubt on the likelihood that auditors intentionally develop or obtain industry specialization which then attracts clients, consistent with recent research suggesting that auditors instead fall backwards into specialization after serving large industry clients over time