Market Reactions to a High-Quality Auditor and Managerial Preference for Audit Quality

Hurley, P.J., and B.W. Mayhew. 2019. Market Reactions to a High-Quality Auditor and Managerial Preference for Audit Quality. AUDITING: A Journal of Practice & Theory In-Press. DOI: 10.2308/ajpt-52478

39 Pages Posted: 2 May 2013 Last revised: 10 Jul 2019

See all articles by Patrick J. Hurley

Patrick J. Hurley

Northeastern University - Accounting Group

Brian W. Mayhew

University of Wisconsin - Madison - Department of Accounting and Information Systems

Date Written: May 1, 2019

Abstract

We insert an automated high-quality (HQ) auditor into established experimental audit markets to test the impact on the supply and demand for audit quality. Our approach allows us to investigate manager demand for audit quality and how other auditors respond to the increased competition from the HQ auditor. Theory predicts that managers will demand high levels of audit quality to avoid investors’ price-protecting behavior, resulting in the HQ auditor dominating the audit market. This demand for high-quality auditing should increase other auditors’ provision of high-quality audits to compete with the high-quality competitor. However, we find strong evidence that the HQ auditor does not dominate the audit market – despite holding audit costs constant and investors placing a premium on HQ auditor reports. We also find that adding an HQ auditor results in other auditors lowering audit quality. Our additional analyses indicate that some managers demand lower audit quality in an attempt to avoid negative audit reports. This evidence is consistent with loss aversion as a potential explanation for this behavior. Our findings indicate a need for additional theoretical and empirical investigation to develop a more comprehensive theory of the demand for auditing.

Keywords: audit quality, demand, manager preference, loss aversion, supply

JEL Classification: M42, M48

Suggested Citation

Hurley, Patrick J. and Mayhew, Brian W., Market Reactions to a High-Quality Auditor and Managerial Preference for Audit Quality (May 1, 2019). Hurley, P.J., and B.W. Mayhew. 2019. Market Reactions to a High-Quality Auditor and Managerial Preference for Audit Quality. AUDITING: A Journal of Practice & Theory In-Press. DOI: 10.2308/ajpt-52478, Available at SSRN: https://ssrn.com/abstract=2258865 or http://dx.doi.org/10.2139/ssrn.2258865

Patrick J. Hurley

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States

Brian W. Mayhew (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-2714 (Phone)
608-263-0477 (Fax)

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