Do Industry-Specialist Auditors Influence Stock Price Crash Risk?
43 Pages Posted: 6 Sep 2014 Last revised: 30 Oct 2014
Date Written: September 6, 2014
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: Suggested Citation