The Flight of Human Capital: Audit Firm M&As and Employee Turnover

UC-Carl H. Lindner College of Business 

Motivated by the waves of mergers and acquisitions (M&As) among accounting firms and the growing talent crisis in the audit industry, we investigate how M&As affect employee turnover and client relationships. We hypothesize that M&As act as employment relationship shocks that increase audit employee turnover and that such post-merger integration frictions hinder performance of the merged firm. Using employee-level data, we find that employee turnover rises sharply following M&As for both target and acquiring firms, with a substantially larger effect for target firms. High-quality employees are more likely to leave target firms but more likely to stay in acquiring firms, suggesting that target firm employees face greater job disruption, while acquiring firm employees may see new career opportunities. We observe no difference in turnover rates for female or minority employees, suggesting that post-M&A structural changes do not disproportionately affect these groups. Finally, we document that higher turnover at both target and acquiring firms is associated with lower client retention, suggesting that talent loss undermines client relationships. Our study contributes to the literature on human capital by highlighting the labor frictions associated with accounting firm structural changes and the downstream effects on client relationships.