Does PSM Really Eliminate the Big N Audit Quality Effect?

48 Pages Posted: 27 Jul 2014 Last revised: 10 Mar 2016

See all articles by Mark L. DeFond

Mark L. DeFond

University of Southern California - Leventhal School of Accounting; European Corporate Governance Institute (ECGI)

David H. Erkens

Georgetown University - McDonough School of Business

Jieying Zhang

The University of Texas at Dallas

Date Written: March 9, 2016

Abstract

A large auditing literature concludes that Big N auditors provide higher audit quality than non-Big N auditors. Recently, however, a high profile study suggests that Propensity Score Matching (PSM) on client characteristics eliminates the Big N effect (Lawrence, Minutti-Meza, and Zhang 2011, hereafter, LMZ). We conjecture that this finding may be affected by PSM’s sensitivity to its design choices and/or by the validity of the audit quality measures used in the analysis. To investigate, we examine random combinations of PSM design choices that achieve covariate balance, and four commonly used audit quality measures. We find that the majority of these design choices support a Big N effect for most of the audit quality measures. Overall, our findings show that it is premature to suggest that PSM eliminates the Big N effect.

Keywords: Big N auditors, Audit quality, Matching

JEL Classification: M41, C13, C14, C15

Suggested Citation

DeFond, Mark and Erkens, David Hendrik and Zhang, Jieying, Does PSM Really Eliminate the Big N Audit Quality Effect? (March 9, 2016). Marshall School of Business Working Paper No. ACC 02.14, Available at SSRN: https://ssrn.com/abstract=2472092 or http://dx.doi.org/10.2139/ssrn.2472092

Mark DeFond (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Accounting Building, Room 206
Los Angeles, CA 90089-0441
United States
213-740-5016 (Phone)
213-747-2815 (Fax)

European Corporate Governance Institute (ECGI) ( email )

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1000 Brussels
Belgium

David Hendrik Erkens

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

Jieying Zhang

The University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States

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