Do Shared Auditors Facilitate Information Transfer between Clients? Evidence from Patent Citations

Abstract

This paper explores auditors’ information intermediary role by examining auditor-facilitated information transfer between clients. We find that a company is more likely to cite another company’s patents when they are audited by the same audit firm. This effect is stronger when the two companies are audited by the same practice office of an audit firm, exhibit intensive innovation activities, and are peers in the product market. Furthermore, the effect of shared auditors on patent citations is more pronounced for the patents that are less familiar to their clients, and the effect is mitigated for the patents that are more difficult for their clients to utilize in their own innovation. In addition, auditor-facilitated information transfer leads to more intensive innovation activities. Overall, our results present evidence that shared auditors facilitate the transfer of public information between their clients.

Keywords: Shared Auditor, Information Transfer, Patent Citation, Corporate Innovation

JEL Classification: M42, O30