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The “ independence ” of expert opinions provided by auditors and associates in Australian takeovers

Australian corporation legislation requires target firms to commission the preparation of an independent expert report in various circumstances. As approximately half of all reports are prepared by an expert with other dealings with the target, concerns have been expressed over the independence of the opinion provided. Public criticism has suggested that where the expert is an associate of the target, their opinion will be more likely to agree with the recommendation of target firm directors. This paper tests the validity of this criticism. The results show that relative to other experts, there is no difference in the rate at which associates of the target provide an opinion that agrees with that of directors. However, the capital market reaction at the release of the expert report indicates that reports produced by such experts are viewed as nonindependent. Abnormal returns are positive and significant when the expert has no dealings with the target and insignificant when the expert is the target’s auditor or discloses other dealings with the target. These results are consistent with these expert opinions as being independent “in fact” but not in “appearance.”