High-Quality Auditor Presence and Informational Influence: Evidence from Firm Investment Decisions

Abstract

This study examines whether the presence of high-quality auditors (Big 4 or industry specialist auditors (ISA)) in an industry facilitates accounting information transfer among industry peers and enhances investment decisions of firms not audited by high-quality auditors (non-Big4-ISA client firms). Consistent with the prediction of informational influence theories, we find that non-Big4-ISA client firms that belong to an industry with a greater presence of high- quality auditors are associated with lower investment inefficiency. The effect is more pronounced for firms with less precise private information. Path analysis shows that the association between high-quality auditor presence and learning firms’ investment inefficiency is explained via a direct path of source credibility and an indirect path mediated by peer firms' accounting information quality. Finally, we find that firms in industries with larger reductions in Big 4 presence following the Sarbanes-Oxley Act of 2002 incur more investment inefficiency.

Keywords: High-quality Auditor Presence; Accounting Information Quality; Source Credibility; Investment Efficiency; Information Uncertainty; Informational Influence; Information Adoption

JEL Classification: M40; M41; M42