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IPO Underpricing and Audit Quality Differentiation within Non‐Big 5 Firms
Author(s) -
Albring Susan M.,
Elder Randal J.,
Zhou Jian
Publication year - 2007
Publication title -
international journal of auditing
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.583
H-Index - 21
eISSN - 1099-1123
pISSN - 1090-6738
DOI - 10.1111/j.1099-1123.2007.00360.x
Subject(s) - initial public offering , reputation , audit , business , quality audit , accounting , big four , auditor independence , quality (philosophy) , auditor's report , joint audit , internal audit , social science , philosophy , epistemology , sociology
The choice of a non‐Big 5 audit firm is optimal for some IPO companies. The choice of audit firm is important because auditor reputation may influence the pricing of the offering. This paper investigates the relationship between IPO underpricing and auditor compensation and proxies for non‐Big 5 audit quality. We develop a continuous measure of auditor reputation based on factor analysis. This measure of auditor reputation is associated with lower IPO underpricing and higher auditor compensation, suggesting that auditor quality is an important determinant for firms hiring non‐Big 5 auditors. We also examine the underlying constructs for auditor quality to determine their separate effects on IPO underpricing and auditor quality. Non‐Big 5 national firms are associated with lower underpricing and higher auditor compensation, suggesting that these firms are perceived to be quality differentiated from non‐national firms. SEC experience for non‐national firms is associated with higher audit fees, suggesting this experience is perceived to be valuable.