Organization Capital and Firm Auditor Choice

• In Event: Breakfast with Research Roundtable Forum Session
  In Paper Session: Audit Quality Roundtable

Abstract

This study investigates the relation between auditor choice and organization capital, an intangible resource of firms. Prior research suggests that firms’ intangibles are positively associated with information asymmetry between management and investors and with investors’ uncertainty on firms’ fundamental value, thus increasing firms’ cost of capital. Accordingly, we expect firms with more organization capital are inclined to engage higher quality audit to mitigate the information asymmetry and enhance investors’ confidence in information quality. As predict, we find that organization capital is positively associated with the proxies of higher quality audit, Big 4 and industry specialist. In additional tests, we rule out alternative explanation of our findings by testing the effect of client size on auditor choice, we adopt other measures of industry expertise, we also consider the event effect of the passage of Sarbanes-Oxley Act (SOX) and the financial crisis on our findings, and finally we get consistent results that support our hypothesis. Our study contributes to the literature of organization capital and auditor choice and highlights the importance of organization capital in corporate policy making.

Authors

• Jaeseong Lim, Hartwick College

• Juan Qin, SUNY-Oneonta