Auditors and Client Investment Efficiency

This study examines the relation between auditors and their client’s investment efficiency. We hypothesize and find that auditor’s characteristics that proxy for an auditor’s knowledge and resources are associated with higher client investment efficiency, after controlling for the auditor’s effect on financial reporting quality. This result is consistent with auditor’s providing informational advantages to their clients in a generalized investment setting. We find that this auditor-effect is more pronounced for clients who have a higher demand for information as measured by client size, industry competition and client complexity. The effect is also more pronounced for clients of longer-tenured auditors. Overall, the results suggest auditors may be one component to the management information environment and as such appear to influence capital investment behavior.

Keywords: Auditors, Investment Efficiency, Auditor Incentives

JEL Classification: G31, M4, M42

Suggested Citation: Suggested Citation

Bae, Gil Soo and Choi, Seung Uk and Dhaliwal, Dan S. and Lamoreaux, Phillip T., Auditors and Client Investment Efficiency (March 7, 2016). Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2754394 or http://dx.doi.org/10.2139/ssrn.2754394