A Tale of Two Intermediaries: Investment Banker–Auditor Social Ties and IPO Quality

53 Pages Posted: 1 Aug 2019 Last revised: 15 Jun 2022

See all articles by Xianjie He

Xianjie He

Shanghai University of Finance and Economics - School of Accountancy

Jeffrey Pittman

Memorial University ; Virginia Tech

Shuwei Sun

Shanghai University of International Business and Economics - School of Accountancy

Donghui Wu

The Chinese University of Hong Kong; Center for Institutions and Governance

Date Written: June 1, 2019

Abstract

Firms undertaking an initial public offering (IPO) appoint investment bankers and auditors to certify information disclosed to investors. We find that social connections significantly increase the likelihood that the bankers and auditors become involved in the same IPO deal. Although some theory and evidence suggests that information transferred via social networks may en-hance economic agents’ performance, other research implies that such links may admit bias in-to auditor judgment or impair their independence. Empirically, we find that IPO firms report higher discretionary accruals when bankers and auditors are socially connected. We also doc-ument that banker–auditor social ties are associated with lower earnings credibility, more fre-quent post-IPO misstatements, worse post-IPO performance, and less efficient use of the IPO proceeds. However, auditors benefit from social connections with bankers by attracting higher fee premiums and securing more future IPO-audit businesses.

Keywords: social ties, auditors, investment bankers, capital allocation

Suggested Citation

He, Xianjie and Pittman, Jeffrey A. and Sun, Shuwei and Wu, Donghui, A Tale of Two Intermediaries: Investment Banker–Auditor Social Ties and IPO Quality (June 1, 2019). Available at SSRN: https://ssrn.com/abstract=3428007 or http://dx.doi.org/10.2139/ssrn.3428007

Xianjie He

Shanghai University of Finance and Economics - School of Accountancy ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

Jeffrey A. Pittman

Memorial University ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Virginia Tech ( email )

United States

Shuwei Sun

Shanghai University of International Business and Economics - School of Accountancy ( email )

No. 1900, Wenxiang Road
Shanghai, 201620
China

Donghui Wu (Contact Author)

The Chinese University of Hong Kong ( email )

Sha Tin
N.T.
Hong Kong
852-3943 7836 (Phone)
852-2603 5114 (Fax)

HOME PAGE: http://www.bschool.cuhk.edu.hk/staff/wu-donghui/

Center for Institutions and Governance ( email )

Room 1033, 10/F
Cheng Yu Tung Building, No. 12 Chak Cheung Street
Hong Kong
China

HOME PAGE: http://www.bschool.cuhk.edu.hk/centres/centre-for-institutions-and-governance/

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