The association between audit quality, accounting disclosures and firm-specific risk: evidence from initial public offerings

In an environment where expected litigation costs were relatively low and the provision of forward-looking accounting information was voluntary (Australia), we show that IPO firms voluntarily providing an earnings forecast within the offer document are significantly more likely to use a high quality auditor, consistent with the signaling role of auditor attestation being at least partially dependent on the extent of voluntary, audited disclosures. Any trade-off between auditor choice with either firm risk or retained ownership is confined to smaller IPOs and/or those using less prestigious underwriters, which are also those where support for the signaling role of auditors (and voluntary disclosure) is evident using a valuation model. Our results highlight the failure of "stylised" signaling models such as [Datar et al. (1991); Hughes (1986)] to recognize extensive interaction between various mechanisms, resulting in multiple signaling equilibria.