Do Industry-Specialist Auditors Influence Stock Price Crash Risk?

43 Pages Posted: 6 Sep 2014 Last revised: 30 Oct 2014

See all articles by Ashok Robin

Ashok Robin

Rochester Institute of Technology (RIT)

Hao Zhang

Rochester Institute of Technology (RIT) - Saunders College of Business

Date Written: September 6, 2014

Abstract

Francis (2011) calls for more research on “the effect of audit quality on economic outcomes.” We respond by examining whether high-quality auditors reduce stock price crash risk, an important consideration for stock investors. We argue that high-quality auditors reduce crash risk because of their information intermediary and corporate governance roles. Using a large sample of U.S. stocks spanning the period 1990-2009, we examine the issue empirically by using auditor industry specialization as our proxy for auditor quality. Our main finding is a statistically significant and negative association between auditor industry specialization and stock price crash risk, implying that high-quality auditors can directly benefit investors by reducing tail risk. In addition, we provide evidence that industry-specialist auditors moderate the effects of opacity, accounting conservatism, and tax avoidance on crash risk. Finally, our main finding of a negative relation between auditor industry specialization and crash risk is robust to using city-level industry specialization as an alternate measure.

Keywords: Auditor quality, Industry specialization, Crash risk, Tail risk, Information intermediary, Corporate governance, Accounting conservatism

JEL Classification: G19, G32, M42

Suggested Citation

Robin, Ashok and Zhang, Hao, Do Industry-Specialist Auditors Influence Stock Price Crash Risk? (September 6, 2014). Auditing: A Journal of Practice & Theory, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2169099 or http://dx.doi.org/10.2139/ssrn.2169099

Ashok Robin

Rochester Institute of Technology (RIT) ( email )

College of Business
Rochester, NY 14623
United States
585-475 5211 (Phone)

Hao Zhang (Contact Author)

Rochester Institute of Technology (RIT) - Saunders College of Business ( email )

105 Lomb Memorial Dr.
Rochester, NY 14623
United States

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