Publication Type
Journal Article
Version
acceptedVersion
Publication Date
3-2023
Abstract
We show that a firm’s likelihood of appointing auditors with industry expertise or with a larger office increases after the firm is affected by an exogenous reduction in analyst coverage, relative to its matched control firms. This effect is stronger for affected firms with greater reductions in analyst monitoring, for smaller or younger firms, for firms with lower institutional or CEO ownership, and when the lost analysts are more effective monitors. We further show that affected firms that switch to high-quality auditors receive more positive market reaction, experience a smaller decrease in stock liquidity and a smaller increase in cost of equity capital relative to other affected firms, suggesting that audit quality has real payoffs. These results collectively provide causal evidence supporting the agency incentive driven demand for high-quality external auditing.
Keywords
demand for high quality audit; agency cost explanation; loss in analyst coverage; brokerage mergers and closures
Discipline
Accounting | Corporate Finance
Research Areas
Corporate Governance, Auditing and Risk Management
Publication
Accounting Horizons
Volume
37
Issue
1
First Page
71
Last Page
92
ISSN
0888-7993
Identifier
10.2308/HORIZONS-2020-070
Publisher
American Accounting Association
Citation
FUNG, Simon Yu Kit; WANG, Zheng; ZHANG, Liandong; and ZHU, Xindong.
Exogenous loss of analyst coverage and choice of audit quality. (2023). Accounting Horizons. 37, (1), 71-92.
Available at: https://ink.library.smu.edu.sg/soa_research/2074
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.2308/HORIZONS-2020-070
