The Association between Auditor Choice, Ownership Retained, and Earnings Disclosure by Firms Making Initial Public Offerings

Contemporary Accounting Research, Vol. 19, No. 1, 2002

27 Pages Posted: 22 Mar 2012 Last revised: 23 Mar 2012

See all articles by Paul A. Copley

Paul A. Copley

James Madison University - School of Accounting

Edward B. Douthett

George Mason University - School of Business

Date Written: March 19, 2012

Abstract

Using a system of three simultaneous equations, we test the predictions of Datar, Feltham, and Hughes 1991 and Hughes 1986 between auditor choice, earnings disclosures, and retained ownership in U.S. firms making initial public offerings of securities. Using a sample of initial public offerings between 1990 and 1997, we find that the demand for high-quality auditors increases with firm risk. Additionally, we find that auditor choice, earnings disclosure, and risk are determinants of retained ownership, which is consistent with the predictions of Datar et al. and Hughes that auditor choice and direct disclosure are substitute signals for ownership retention. Further, our results suggest that the signals chosen (Le., retained ownership, auditor choice, and disclosure) are related through their cost structures and are chosen jointly to minimize the overall cost to the entrepreneur.

Keywords: Audit fees, Auditor choice, New issues, Retained ownership

Suggested Citation

Copley, Paul A. and Douthett, Edward B., The Association between Auditor Choice, Ownership Retained, and Earnings Disclosure by Firms Making Initial Public Offerings (March 19, 2012). Contemporary Accounting Research, Vol. 19, No. 1, 2002. Available at SSRN: https://ssrn.com/abstract=2026075

Paul A. Copley

James Madison University - School of Accounting ( email )

MSC 0203
335 Showker Hall
Harrisonburg, VA 22807
United States
540-568-3081 (Phone)

Edward B. Douthett (Contact Author)

George Mason University - School of Business ( email )

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