Audit Quality, Auditor Compensation and IPO Underpricing

42 Pages Posted: 30 Jul 2007

See all articles by Xin (Simba) Chang

Xin (Simba) Chang

Nanyang Business School

André Gygax

University of Melbourne - Department of Finance

Elaine Oon

University of Melbourne - Faculty of Business and Economics

Hong Feng Zhang

Deakin University - Deakin Business School

Date Written: July 30, 2007

Abstract

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

Suggested Citation

Chang, Xin and Gygax, André and Oon, Elaine and Zhang, Hong Feng, Audit Quality, Auditor Compensation and IPO Underpricing (July 30, 2007). Available at SSRN: https://ssrn.com/abstract=1003707 or http://dx.doi.org/10.2139/ssrn.1003707

Xin Chang

Nanyang Business School ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: http://www.ntu.edu.sg/home/changxin

André Gygax (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Business and Economics
Parkville, Victoria 3010
Australia

Elaine Oon

University of Melbourne - Faculty of Business and Economics ( email )

Victoria, 3010
Australia

Hong Feng Zhang

Deakin University - Deakin Business School ( email )

221 Burwood Highway
Burwood, Victoria 3215
Australia

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