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The impact of individual auditor reputation on external financing choice: evidence from China

  • 2019.02.26
  • Event
Speaker: Dr. Ning Zhang (Queen's University)

Topic:

The impact of individual auditor reputation on external financing choice: evidence from China

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Time&Date:?

?? 12:00-13:30 pm, 2019/3/4 (Monday)

Venue:

? Room 619, Teaching A

Speaker:

?Dr. Ning Zhang (Queen's University)

Abstract: We examine whether the revelation of individual audit partner reputation affects client firms’ external financing choice. Specifically, we investigate whether a firm switches its financing choices once its auditor partner is revealed to be a low-quality partner, captured by the event that one of the audit partner’s other clients is sanctioned for financial misreporting by the regulator. To do so, we identify firms audited by a low-quality partner as the treatment firms and designate firms audited by other audit partners from the same audit office as the control firms. Using 6,874 firm-years listed in the Shanghai and Shenzhen stock exchanges, we find that, on average, the treatment firm switches from equity financing to credit financing after the revelation of individual audit partner quality. In addition, reduced equity financing is primarily concentrated in firms that have chosen to keep the low-quality partner or firms that have replaced a low-quality partner with another low-quality partner. By building an implicit link between the non-sanctioned firm with the sanctioned firm through a common audit partner, we show that investors can infer the quality of external audits using the individual-auditor level information, providing empirical supports to the new PCAOB rule that requires disclosure of the partner-level information.

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