A Two-Sided Matching Model of the Audit Market for IPO Firms
47 Pages Posted: 15 Feb 2018
Date Written: February 4, 2018
We estimate a two-sided matching model of IPO firms to auditors. Doing so allows us to separate the effects of sorting and influence in this audit market, and identify the effect that each has on observed audit quality. We find evidence that sorting on inherent quality of the client exists at the time auditors and clients match with each other. However, even after controlling for the effects of sorting, Big 4 auditors exert positive influence on audit quality; the probability of a restatement is significantly lower, all else equal, for clients of Big 4 auditors.
Keywords: audit quality, two-sided matching, IPO audits, auditor selection
JEL Classification: M42
Suggested Citation: Suggested Citation