Auditor Selection and Investment Risk
35 Pages Posted: 4 Oct 2017 Last revised: 1 Aug 2018
There are 2 versions of this paper
Auditor Selection and Investment Risk
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: Suggested Citation