Differences in Conservatism between Big Eight and Non-Big Eight Auditors
58 Pages Posted: 3 May 2014
Date Written: October 2001
Auditors’ incentives to be conservative are likely to vary both cross-sectionally and over time based on their legal liability exposure. We predict that Big Eight (Six/Five) auditors are likely to be more conservative than non-Big Eight Auditors. We show that the earnings reported by Big Eight auditees are more conservative than the earnings of non-Big Eight auditees, utilizing several measures from Basu (1997). The difference in conservatism between Big Eight and non-Big Eight auditees is higher in periods of high auditor liability exposure, consistent with Big Eight auditors being relatively more conservative when exposed to greater legal liability.
Keywords: Earnings-return relation; Negative returns
JEL Classification: M41, D21, D82, G14, G38, K41, N20
Suggested Citation: Suggested Citation