Audit Quality, Auditor Compensation and IPO Underpricing
42 Pages Posted: 30 Jul 2007
Date Written: July 30, 2007
By examining a sample of Australian firms going public over the period 1996 to 2003, we jointly study the impact of audit quality on auditor compensation and IPO underpricing. We find that quality (Big 4) audit firms earn significantly higher fees than Non-Big 4 auditors, and audit quality is positively associated with IPO underpricing. The positive relation between audit quality and underpricing is more pronounced for small issues, IPOs underwritten by non-prestigious underwriters, and those that are not backed by venture capitalists. Taken together, our results suggest that quality auditors serve as a signaling device that enhances post-issue market value of equity.
Keywords: Auditor quality, Audit fees, Assurance fees, IPO underpricing
JEL Classification: G12, G24, D82, M41, M49
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