Auditor Selection and Investment Risk

35 Pages Posted: 4 Oct 2017 Last revised: 1 Aug 2018

See all articles by Benjamin W. Hoffman

Benjamin W. Hoffman

Cleveland State University

Trung Pham

Kent State University - College of Business Administration

Mai Dao

University of Toledo - College of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2018

Abstract

Purpose: This paper investigates the relation between the riskiness of a firm’s investment policies and the firm’s appointment of an external auditor.

Design/Methodology/Approach: Using a sample of U.S. publicly listed companies from 2004- 2014, we hypothesize that firms with riskier investment policies are more likely to choose a higher quality auditor to reduce information asymmetry and increase the credibility of financial reports. We use logit regression analysis, applying two measures of auditor quality (Big 4 and industry specialist auditors) and four measures of investment policy risk (research and development expenditure, diversification, capital expenditures, and acquisitions).

Findings: We generally find that firms with riskier investment policies choose higher quality auditors. Specifically, firms with higher R&D expenditures and acquisitions are more likely to hire a Big 4 and/or industry specialist auditor, while firms with lower capital expenditures are more likely to select a Big 4 auditor.

Practical Implications: Our findings support the notion that management characteristics and policies still may have influence over external auditor selection. This may be of interest to regulators and policymakers.

Originality/Value: There is only limited research examining the effect of a firm’s investment policies on that firm’s decision

Keywords: Auditor choice, investment risk, auditor quality

Suggested Citation

Hoffman, Benjamin W. and Pham, Trung and Dao, Mai, Auditor Selection and Investment Risk (June 1, 2018). Available at SSRN: https://ssrn.com/abstract=3047610 or http://dx.doi.org/10.2139/ssrn.3047610

Benjamin W. Hoffman (Contact Author)

Cleveland State University ( email )

2121 Euclid Ave
Cleveland, OH 44115
United States
2166874723 (Phone)

Trung Pham

Kent State University - College of Business Administration ( email )

P.O. Box 5190
Kent, OH 44242-0001
United States

Mai Dao

University of Toledo - College of Business Administration ( email )

2801 W. Bancroft
Toledo, OH 43606
United States

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