A Tale of Two Intermediaries: Investment Banker–Auditor Social Ties and IPO Quality
53 Pages Posted: 1 Aug 2019 Last revised: 15 Jun 2022
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
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