Empirical Analysis of the Economic Demand for Auditing in the Initial Public Offerings Market
Posted: 8 Aug 1999
This paper examines the demand for auditing in the initial public offerings (IPO) market where informational asymmetries abound. Because these asymmetries create a demand for information to help establish equity values and for market signaling to mitigate adverse selection, IPOs offer a natural setting for studying the importance of auditing. Consistent with Dye?s  dual characterization of the audit as both enhancing resource allocation (an informational role) and providing investors with a claim on the auditor in the event of an audit failure (an insurance role), I test the demand for auditing arising from both informational signaling and insurance signaling. The results support both roles for auditing, though the evidence in support of an insurance signaling role seems particularly strong.
JEL Classification: M49, G24
Suggested Citation: Suggested Citation