The Interconnectivity of Audit Demand

• In Event: Audit Demand

Abstract

We examine whether the decision to begin or cease and audit is interconnected among firms within a local geographic area. Using city-level bank data, we find that the likelihood of a bank beginning or ceasing to obtain an audit is influenced by the proportion of banks making a similar level of assurance within a local MSA. Choosing to begin an audit yields benefits to a firm in terms of increased levels of uninsured deposits; however, the benefits are attenuated as more banks make a similar choice, suggesting the herding may not be rational. We find that degree of competition in a local area moderates the herding behavior, with a significantly greater peer effect in high-competition areas compared to lower competition locations. Together, our findings suggest that there is an interconnectivity to the demand of audit, which may lead to banks exhibiting irrational herding behavior.

Authors

• Matthew James Beck, University of Kansas

• Nathan Lundstrom, University of Kansas

• Sarah B Stuber, Texas A&M University