A Two-Sided Matching Model of the Audit Market for IPO Firms.

• In Event: Auditor Choice and Audit Quality

Abstract

We estimate a two-sided matching model of IPO firms to auditors. Doing so allows us to study the effects of sorting and influence in the audit market and the effect that each has on audit quality. We find that Big 4 auditors and more complex clients prefer to be matched with each other. We find evidence that sorting on inherent quality of the client exists at the time auditors are matched with clients but that even after controlling for the effects of sorting, Big 4 auditors exert positive influence; the probability of a restatement is significantly lower, all else equal, for clients of Big 4 auditors.

Authors

• Aneesh Raghunandan, London School of Economics

• Maureen McNichols, Stanford University

• Ken Li, Stanford University