A Two-Sided Matching Model of the Audit Market for IPO Firms

47 Pages Posted: 15 Feb 2018

See all articles by Ken Li

Ken Li

McMaster University - Michael G. DeGroote School of Business

Maureen F. McNichols

Stanford University

Aneesh Raghunandan

London School of Economics

Date Written: February 4, 2018

Abstract

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

Li, Ken and McNichols, Maureen F. and Raghunandan, Aneesh, A Two-Sided Matching Model of the Audit Market for IPO Firms (February 4, 2018). 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)

London School of Economics ( email )

United Kingdom

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