Do Industry Specialist Auditors Improve Investment Efficiency?

Abstract

This paper examines whether the investment efficiency of client firms with industry specialist auditors is higher relative to that with non-specialist auditors. Using a large sample from the period1976 to 2005, we find that investment efficiency of client firms with industry specialist auditors is significantly higher than that with non-specialist auditors. Furthermore, industry specialist auditors discourage both over-investment and under-investment, although they do so more in the over-investment side relative to the under-investment side. The results are generally unaffected by the different definitions of specialist auditors, clients’ firm size, yearly regressions, differences in the market share of specialist auditors, and the potential self-selection bias.

Data Availability: All data can be drawn from publicly available sources.

Keywords: Industry specialist auditors, Audit quality, Value of audits, Investment efficiency

JEL Classification: M4, M42