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Audit quality, auditor compensation and initial public offering underpricing
Author(s) -
Chang Xin,
Gygax André F.,
Oon Elaine,
Zhang Hong Feng
Publication year - 2008
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.2008.00275.x
Subject(s) - initial public offering , underwriting , audit , business , accounting , quality audit , equity (law) , quality (philosophy) , joint audit , external auditor , finance , internal audit , philosophy , epistemology , political science , law
We jointly study the impact of audit quality on auditor compensation and initial public offering (IPO) underpricing using a sample of Australian firms going public over the period 1996–2003. We find that quality (Big Four) audit firms earn significantly higher fees than non‐Big Four auditors, and audit quality is positively associated with IPO underpricing. The positive relation between audit quality and underpricing is more pronounced for small issues, IPOs underwritten by non‐prestigious underwriters, and those that are not backed by venture capitalists. Taken together, our results suggest that quality auditors serve as a signalling device that enhances post‐issue market value of equity.