Auditor Selection and Investment Risk

41 Pages Posted: 23 Aug 2022

See all articles by Mai Dao

Mai Dao

University of Toledo - College of Business Administration

Benjamin W. Hoffman

Cleveland State University

Trung Pham

University of Illinois Springfield

Justyna Skomra

Pennsylvania State University - Sam and Irene Black School of Business

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Abstract

This paper investigates the relation between the riskiness of a firm’s investment policies and the firm’s selection of an external auditor. Using a sample of U.S. publicly listed companies from 2004-2018, we hypothesize that firms with riskier investment policies are more likely to choose a higher quality auditor to reduce information asymmetry and increase the credibility of financial reports. We use logit regression analysis, applying four measures of auditor quality and four measures of investment policy risk. We find that firms with riskier investment policies are more likely to choose higher quality auditors. Specifically, firms with higher R&D expenditures, a greater number of business and geographic segments, lower capital expenditures and fewer acquisitions are more likely to hire an industry-specialist auditor or a Big 4 auditor. These results are robust to various additional analyses and robustness checks. Our findings support the notion that corporate policies directly determined by firm management still may influence external auditor selection in the post-SOX environment. This may be of interest to regulators and policymakers.

Keywords: auditor choice, investment risk, auditor quality

Suggested Citation

Dao, Mai and Hoffman, Benjamin W. and Pham, Trung and Skomra, Justyna, Auditor Selection and Investment Risk. Available at SSRN: https://ssrn.com/abstract=4198562 or http://dx.doi.org/10.2139/ssrn.4198562

Mai Dao

University of Toledo - College of Business Administration ( email )

2801 W. Bancroft
Toledo, OH 43606
United States

Benjamin W. Hoffman (Contact Author)

Cleveland State University ( email )

2121 Euclid Ave
Cleveland, OH 44115
United States
2166874723 (Phone)

Trung Pham

University of Illinois Springfield ( email )

Springfield, IL 62703
United States

Justyna Skomra

Pennsylvania State University - Sam and Irene Black School of Business ( email )

4701 College Dr
Erie, PA 16563
United States

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