Auditor Selection and Product Market Competition

• In Event: Auditing 1

Abstract

The purpose of this study is to investigate the relation between product market competition and firms’ choice of external auditors. On the basis of prior literature on product market competition and auditor selection, we formulate two unassigned hypotheses. On the one hand, product market competition is considered to be an effective corporate governance mechanism that can reduce agency problems and assure the integrity of financial reports. This in turn reduces the demand for high quality auditors. On the other hand, prior studies show product market competition does not reduce agency problems but increases information asymmetry. This motivates firms operating in competitive market to hire a high quality auditor to increase the credibility of financial information and to enjoy potential benefits of having credible financial reports. Based on the sample of U.S. publicly listed firms for the 2004-2014 period, we find that firms with a high level of product market competition are more likely to select high quality auditors (i.e., Big 4 or industry specialist auditors). The findings extend prior research on product market competition and firms’ choice of external auditors.

Authors

• Trung Huy Pham, Kent State University - Kent

• Pervaiz Alam, Kent State University

• Mai Dao, University of Toledo