The Demand for Auditor Reputation: Evidence from a Structural Model

Abstract

This study applies a structural approach to provide novel evidence on the demand for auditor reputation. Using the discrete choice model for demand estimation, our findings reveal that auditors involved in restatements suffer reputational losses, particularly at the audit firm level. Furthermore, we identify differential effects, e.g., that reputational losses are larger for Big 4 than non-Big 4 auditors. Using the parameters obtained in the demand estimation, we perform counterfactual analyses. We find that being involved in restatements results in reputational losses of up to 3.8 million USD (0.1% of audit fees) per year, associated with a market share loss of up to 4.3%.

Keywords: audit market, auditor demand, restatements

JEL Classification: M42