The association between audit quality, accounting disclosures and firm-specific risk: Evidence from initial public offerings

• Published in: Journal of accounting and public policy 2003-09, Vol.22 (5), p.377-400
• Main Authors: Lee, Philip, Stokes, Donald, Taylor, Stephen, Walter, Terry
• Format: Article
• Language: English
• Subjects: Accounting; Auditing; Costs; Disclosure; Initial public offering; Initial public offerings; International; Litigation; Litigation risk; Policy studies; Quality of service; Risk; Studies; Underwriter quality; Underwriting
• ISSN: 0278-4254; 1873-2070
• DOI: 10.1016/j.jaccpubpol.2003.08.003

In an environment where expected litigation costs were relatively low and the provision of forward-looking accounting information was voluntary (Australia), we show that IPO firms voluntarily providing an earnings forecast within the offer document are significantly more likely to use a high quality auditor, consistent with the signaling role of auditor attestation being at least partially dependent on the extent of voluntary, audited disclosures. Any trade-off between auditor choice with either firm risk or retained ownership is confined to smaller IPOs and/or those using less prestigious underwriters, which are also those where support for the signaling role of auditors (and voluntary disclosure) is evident using a valuation model. Our results highlight the failure of “stylised” signaling models such as [Datar et al. (1991); Hughes (1986)] to recognize extensive interaction between various mechanisms, resulting in multiple signaling equilibria.