Capital Market Consequences of Audit Office Size: Evidence from Stock Price Crash Risk

Auditing: A Journal of Practice & Theory, 2020

Posted: 12 Jun 2020

See all articles by Jeffrey L. Callen

Jeffrey L. Callen

University of Toronto - Rotman School of Management

Xiaohua Fang

Florida Atlantic University

Baohua Xin

University of Toronto - Rotman School of Management

Wenjun Zhang

Dalhousie University

Date Written: January 8, 2020

Abstract

This study examines the association between the office size of engagement auditors and their clients’ future stock price crash risk, a consequence of managerial bad news hoarding. Using a sample of U.S. public firms with Big 4 auditors, we find robust evidence that local audit office size is significantly and negatively related to future stock price crash risk. The evidence is consistent with the view that large audit offices effectively detect and deter bad news hoarding activities in comparison with their smaller counterparts. We further explore two possible explanations for these findings, the Auditor Incentive Channel and the Auditor Competency Channel. Our empirical tests offer support for both channels.

Keywords: crash risk, audit office, auditor incentives, auditor competency

JEL Classification: G12, G34, M49

Suggested Citation

Callen, Jeffrey L. and Fang, Xiaohua and Xin, Baohua and Zhang, Wenjun, Capital Market Consequences of Audit Office Size: Evidence from Stock Price Crash Risk (January 8, 2020). Auditing: A Journal of Practice & Theory, 2020, Available at SSRN: https://ssrn.com/abstract=3580410

Jeffrey L. Callen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-5641 (Phone)
416-971-3048 (Fax)

Xiaohua Fang (Contact Author)

Florida Atlantic University ( email )

United States

Baohua Xin

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Wenjun Zhang

Dalhousie University ( email )

Halifax
Canada

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