Two-Sided Matching in the Audit Market

Forthcoming, The Accounting Review https://doi.org/10.2308/TAR-2022-0074

57 Pages Posted: 15 Feb 2018 Last revised: 29 Jan 2025

See all articles by Ken Li

Ken Li

McMaster University - Michael G. DeGroote School of Business

Maureen F. McNichols

Stanford University

Aneesh Raghunandan

Yale School of Management

Date Written: November 22, 2024

Abstract

We develop and estimate a two-sided matching model of auditors and clients. We find evidence that auditors and clients engage in matching based on their preferences on both observable and unobservable characteristics. This matching appears to partly explain the “Big 4 effect” on audit outcomes: after controlling for the effects of matching, we find that the positive influence of having a Big 4 auditor on serious restatements and serious comment letter conversations with the SEC either weakens or disappears. Collectively, our results highlight the importance of accounting for two-sided matching between auditors and clients in understanding the influence of auditors on clients’ financial reporting practices.

Keywords: Auditing, Audit markets, Audit quality, Auditor selection, Two-sided matching

JEL Classification: M40, M42

Suggested Citation

Li, Ken and McNichols, Maureen F. and Raghunandan, Aneesh, Two-Sided Matching in the Audit Market (November 22, 2024). Forthcoming, The Accounting Review https://doi.org/10.2308/TAR-2022-0074, Available at SSRN: https://ssrn.com/abstract=3117828 or http://dx.doi.org/10.2139/ssrn.3117828

Ken Li

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Maureen F. McNichols

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-0833 (Phone)

Aneesh Raghunandan (Contact Author)

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511

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