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

Philip Lee, Donald Stokes, Stephen Taylor*, Terry Walter

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

48 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)377-400
Number of pages24
JournalJournal of Accounting and Public Policy
Volume22
Issue number5
DOIs
Publication statusPublished - Sep 2003

Keywords

  • Auditing
  • Initial public offering
  • International
  • Litigation risk
  • Underwriter quality

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