Two-Sided Matching in the Audit Market
56 Pages Posted: 15 Feb 2018 Last revised: 11 Feb 2022
Date Written: February 10, 2022
We estimate a two-sided matching model of firms with auditors. Doing so allows us to separate the effects of sorting from influence in the audit market and identify the effect that each has on observed audit quality. We find evidence that auditors and clients engage in assortative matching based on inherent client quality. This assortative matching appears to explain much of the “Big 4” effect on several common audit outcomes; after controlling for the effects of matching, we find no evidence of auditor influence on the likelihood of a restatement, as well as mixed evidence on whether Big 4 auditor presence affects serious comment letter conversations with the SEC. We find that selection appears to have less of an effect on the likelihood of internal control weaknesses. 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: audit quality, two-sided matching, auditor selection
JEL Classification: M42
Suggested Citation: Suggested Citation