The Importance of Information Asymmetry to Auditor Choice, Audit Fees, and Going Concern Opinions: Evidence from Exploiting Exogenous Shifts in Analyst Coverage

55 Pages Posted: 13 May 2017 Last revised: 14 May 2017

See all articles by Joshua L. Gunn

Joshua L. Gunn

University of Pittsburgh - Katz Graduate School of Business

Nicholas Hallman

University of Texas at Austin

Chan Li

University of Pittsburgh - Katz Graduate School of Business

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Date Written: May 1, 2017

Abstract

We analyze whether information asymmetry affects three major aspects of the audit process using an instrumental variables research design that exploits exogenous increases in information asymmetry stemming from brokerage house mergers and closures. Consistent with our predictions, we find that a rise in information asymmetry leads to: (i) a higher (lower) probability that firms switch to a higher (lower) quality auditor, implying that information asymmetry stimulates demand for auditing, (ii) higher audit fees, implying that worse information asymmetry is a priced audit risk, and (iii) a higher probability that auditors render a going concern opinion, implying that auditors’ reporting decisions are sensitive to this risk. In another approach to confronting the endogeneity threat that undermines reliable identification in extant research, our core evidence holds in a difference-in-difference framework that involves examining the three auditing outcomes surrounding the brokerage house merger/closure window.

Keywords: Information Asymmetry, Demand for Auditing, Audit Fees, Going Concern Opinions

JEL Classification: M41, M42

Suggested Citation

Gunn, Joshua L. and Hallman, Nicholas and Li, Chan and Pittman, Jeffrey A., The Importance of Information Asymmetry to Auditor Choice, Audit Fees, and Going Concern Opinions: Evidence from Exploiting Exogenous Shifts in Analyst Coverage (May 1, 2017). Available at SSRN: https://ssrn.com/abstract=2967125 or http://dx.doi.org/10.2139/ssrn.2967125

Joshua L. Gunn

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Nicholas Hallman

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Chan Li (Contact Author)

University of Pittsburgh - Katz Graduate School of Business ( email )

135 N Bellefield Ave
Pittsburgh, PA 15260
United States

Jeffrey A. Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

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