To Share or Not to Share: The Importance of Peer Firm Similarity to Auditor Choice

63 Pages Posted: 30 Jun 2017 Last revised: 5 Feb 2018

See all articles by Kenneth L. Bills

Kenneth L. Bills

University of Arkansas

Matthew Cobabe

Virginia Tech

Jeffrey Pittman

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

Sarah E. Stein

Virginia Tech

Date Written: February 5, 2018

Abstract

A firm’s decision on whether to choose the same auditor as a close competitor reflects a trade-off between exercising caution to protect its proprietary information and pursuing the benefits of auditor knowledge derived from providing services to comparable clients. Using a pairwise similarity measure based on descriptions from regulatory filings, we find that peer firms are more likely to engage the same auditor when their product offerings are more similar. Importantly, we find this relation is greater when the focal firm experiences more litigation risk, but is moderated when the focal firm operates in a highly competitive or innovative industry, is a market leader, or has a “cozy” relationship with its auditor. Collectively, we provide large-sample evidence that, although the upside stemming from auditor knowledge, on average, dominates the downside of greater vulnerability to information leakage, certain proprietary cost concerns motivate firms to forego the benefits of selecting a more knowledgeable auditor.

Keywords: auditor choice, product similarity, auditor expertise, proprietary costs

JEL Classification: M4, M42

Suggested Citation

Bills, Kenneth L. and Cobabe, Matthew Alan and Pittman, Jeffrey A. and Stein, Sarah E., To Share or Not to Share: The Importance of Peer Firm Similarity to Auditor Choice (February 5, 2018). Available at SSRN: https://ssrn.com/abstract=2994516 or http://dx.doi.org/10.2139/ssrn.2994516

Kenneth L. Bills

University of Arkansas ( email )

Fayetteville, AR 72701
United States

Matthew Alan Cobabe

Virginia Tech ( email )

Pamplin College of Business
Blacksburg, VA 24061
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)

Sarah E. Stein (Contact Author)

Virginia Tech ( email )

Blacksburg, VA 24061
United States

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