Auditor choice in real estate firms: a quality signal?

PurposeReal estate is a capital-intensive industry for which the asset values tend to be highly volatile and uncertain. Transaction costs in the industry are therefore high, and transparency for investors may be low. The need to signal reliable estimates of property assets, in the communication to e...

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Bibliographic Details
Published in:Journal of European real estate research 2023-10, Vol.16 (2), p.258-270
Main Authors: Palm, Peter, Bohman, Helena
Format: Article
Language:English
Subjects:
Accounting firms
Annual reports
Audit quality
Auditing
Auditor choice
Auditors
Big four
Big Four accounting firms
Costs
Hypotheses
Quality signal
Real estate companies
Signaling
Stockholders
Transaction costs
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Summary:PurposeReal estate is a capital-intensive industry for which the asset values tend to be highly volatile and uncertain. Transaction costs in the industry are therefore high, and transparency for investors may be low. The need to signal reliable estimates of property assets, in the communication to external stakeholders, can therefore be expected to be of extra importance in this sector. The purpose of this paper is to investigate how real estate firms use big four auditors to signal quality.Design/methodology/approachThe authors use Swedish firm level data containing all limited liability real estate companies in the country to determine the determinants of big four auditors. The data set consists of 34,306 observations and is analyzed through logit regressions.FindingsThe results show that big four companies are primarily contracted by large and mature companies, rather than new firms or firms with volatile financial records, although the latter could be expected to have a large need to signal quality. The authors also find that firms listed on the stock market and firms targeting public use real estate are more inclined to use big four companies.Originality/valueReal estate is a capital-intensive industry for which the asset values tend to be highly volatile and uncertain. Transaction costs in the industry are therefore high, and transparency for investors may be low. The need to signal reliable estimates of property assets, in the communication to external stakeholders, can therefore be expected to be of extra importance in this sector. No prior study of this area has been detected.
ISSN:1753-9269
1753-9277
1753-9277
DOI:10.1108/JERER-09-2022-0026