Two-Sided Matching in the Audit Market

Abstract

We develop and estimate a two-sided matching model of clients with auditors. We find evidence that auditors and clients engage in matching based on their preferences for both observable and unobservable characteristics. This matching appears to partly explain 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. 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