Does Auditor Choice Matter to Foreign Investors? Evidence from Foreign Mutual Funds Worldwide

51 Pages Posted: 3 Sep 2011 Last revised: 15 Aug 2014

Julia Chou

Florida International University

Nataliya S. Zaiats

Suffolk University Sawyer Business School

Bohui Zhang

University of New South Wales (UNSW) - School of Banking and Finance; Financial Research Network (FIRN)

Date Written: March 2014

Abstract

This paper examines whether firms' auditor choice affects their ability to access foreign equity capital. Using the equity holdings of 34,837 foreign mutual funds from 28 countries, we find evidence that appointing a Big 4 auditor increases the level of foreign mutual fund ownership in firms. This link strengthens in firms with high information asymmetries and persists even at the country level. But the importance of auditor choice varies across three exogenous information events. The Big 4 effect declines after the Enron-Andersen fiasco in 2002, especially for non-U.S. firms not subject to the provisions of the Sarbanes-Oxley Act. Auditor choice and IFRS adoption play complementary roles in determining a firm's foreign ownership, and such roles are more pronounced in firms from countries with strong securities regulations and enforcement regimes. Finally, appointing Big 4 auditors is particularly important for firms to attract foreign capital during the 2008 global financial crisis.

Keywords: foreign mutual funds, auditor choice, IFRS, Enron-Andersen Collapse, and 2008 global financial crisis

JEL Classification: G11, G23, M42

Suggested Citation

Chou, Julia and Zaiats, Nataliya S. and Zhang, Bohui, Does Auditor Choice Matter to Foreign Investors? Evidence from Foreign Mutual Funds Worldwide (March 2014). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1921112 or http://dx.doi.org/10.2139/ssrn.1921112

Wen-Hsiu Chou

Florida International University ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Nataliya S. Zaiats

Suffolk University Sawyer Business School ( email )

8 Ashburton Plance
Boston, MA 02108
United States

Bohui Zhang (Contact Author)

University of New South Wales (UNSW) - School of Banking and Finance ( email )

Australian School of Business
Sydney NSW, 2052
Australia
61293855834 (Phone)
61293856347 (Fax)

HOME PAGE: http://www.banking.unsw.edu.au/nps/servlet/portalservice?GI_ID=System.LoggedOutInheritableArea&maxWn

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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