The Roles of Capital Market Investors and Auditors in the Shared Auditor Spillover Effect
Posted: 7 Feb 2020
Date Written: January 24, 2020
This paper studies the interaction among key stakeholders (investors, managers, and auditors) in the corporate behavioral spillover through shared auditors. Upon the release of U.S. Securities and Exchange Commission comment letters on issues relating to the recognition of revenue, gains, and losses in 10-K filings, both recipients and other clients of the same auditor experience negative cumulative abnormal returns (CARs) and a higher future degree of accounting conservatism. In both comment letter recipients and non-recipients with a shared auditor, the magnitude of CARs on their stocks is positively associated with the future degree of accounting conservatism. Surprisingly, CARs on the stock of comment letter recipients predict the future degree of accounting conservatism in non-recipients with a shared auditor over and beyond CARs on the stocks of the latter. Manager–shareholder incentive alignment does not affect the association between a firm’s CAR and its future degree of accounting conservatism. The results suggest the dominance of the informational intermediary role of auditors over the monitoring role of capital market investors in the shared auditor spillover effect.
Keywords: SEC comment letters, accounting conservatism, auditors, investors, spillover
JEL Classification: M41, M48, G38
Suggested Citation: Suggested Citation