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Audit Firm Size, Industry Specialization and Earnings Management by Initial Public Offering Firms

Posted: 2 Dec 2002  

Randal J. Elder

Syracuse University

Jian Zhou

University of Hawaii at Manoa

Date Written: July 2002

Abstract

This paper investigates the relationship between audit quality (as measured by audit firm size and industry specialization) and earnings management (as measured by discretionary accruals) in the initial public offering process. Earnings management in the IPO process is of particular concern given the information asymmetry between management and investors and the incentive of management to engage in earnings management. We find that Big 5 auditors and industry specialist auditors are related to less earnings management in the IPO process. Our study contributes to the literature in two ways: (1) we show that audit quality is an important determinant for earnings management in the IPO process; (2) we show that industry specialization, as a measure of audit quality, also constrains earnings management.

Keywords: audit quality, industry specialization, earnings management, initial public offering

JEL Classification: M49

Suggested Citation

Elder, Randal J. and Zhou, Jian, Audit Firm Size, Industry Specialization and Earnings Management by Initial Public Offering Firms (July 2002). Available at SSRN: https://ssrn.com/abstract=321041

Randy Elder

Syracuse University ( email )

900 S. Crouse Avenue
School of Management Department of Accounting
Syracuse, NY 13244
United States
315-443-3359 (Phone)
315-443-5457 (Fax)

Jian Zhou (Contact Author)

University of Hawaii at Manoa ( email )

Honolulu, HI 96822
United States

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