The Association between Audit Quality, Accounting Disclosures and Firm-Specific Risk: Evidence from the Australian IPO Market

32 Pages Posted: 22 Mar 2000

See all articles by Philip J. Lee

Philip J. Lee

University of Sydney

Donald J. Stokes

Monash University

Stephen L. Taylor

University of Technology Sydney; Financial Research Network (FIRN)

Terry S. Walter

University of Sydney; University of Technology, Sydney - School of Finance and Economics; Financial Research Network (FIRN)

Date Written: October 1999

Abstract

In an environment where expected litigation costs are relatively low (Australia), we provide evidence strongly consistent with signaling considerations influencing the choice of auditor by initial public offering (IPO) firms. When our analysis is confined to smaller IPOs and/or IPOs using less prestigous underwriters (i.e., those IPOs where the use of a high quality auditor is less "routine"), we find that the probability of selecting a high quality auditor is positively related to IPO firms' riskiness, negatively related to the level of retained ownership by the initial owners and positively related to the decision to voluntarily provide information about expected earnings. these results jointly provide support for the signaling models of Datar, Feltham and Hughes (1991) and Hughes (1986), whereby the choice of a high quality auditor represents a trade-off with the level of retained ownership, but is complimentary to the extent of direct disclosure.

JEL Classification: G24, G32, M41, M44, M49

Suggested Citation

Lee, Philip John and Stokes, Donald and Taylor, Stephen L. and Walter, Terry Stirling, The Association between Audit Quality, Accounting Disclosures and Firm-Specific Risk: Evidence from the Australian IPO Market (October 1999). Available at SSRN: https://ssrn.com/abstract=210888 or http://dx.doi.org/10.2139/ssrn.210888

Philip John Lee

University of Sydney ( email )

Discipline of Accounting
Faculty of Economics and Business (H69)
Sydney NSW 2006
Australia
+61 2 9351 3067 (Phone)
+61 2 9351 6638 (Fax)

HOME PAGE: http://www.econ.usyd.edu.au/staff/philipl

Donald Stokes

Monash University ( email )

Department of Accounting and Finance
P O Box 197
Caulfield East, Victoria 3145
Australia

Stephen L. Taylor (Contact Author)

University of Technology Sydney ( email )

UTS Business School
PO Box 123 Broadway
Sydney, NSW 2007
Australia
61295143437 (Phone)
61295143513 (Fax)

Financial Research Network (FIRN)

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

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

Terry Stirling Walter

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

University of Technology, Sydney - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia
+61 2 9514 3860 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=5373

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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