Do Auditors Reduce Clients’ Costs of Processing Public Information? Evidence from Patent Citations

Abstract

We use patent citations to assess whether auditors reduce their clients’ costs of processing public information. We find that a company is more likely to cite another company’s patents when they are audited by the same audit firm. To mitigate the concern that this result is driven by commonality in the fundamentals of the two companies, we include a rich set of company-pair controls and conduct various tests that are specific to the information mechanism. We show that the effect of a shared auditor on cross-client patent citations is stronger when the two clients both exhibit intensive innovation activities, are industry peers, and share the same practice office of the audit firm. We also find evidence that shared auditors matter more for the citations of patents that are more recent and easier for outsiders to utilize. Overall, our findings suggest that auditors play an information intermediary role and help reduce their clients’ costs of processing public information.

Keywords: Shared Auditor, Information Processing Cost, Patent Citation, Innovation

JEL Classification: M42, O30