Audit quality, auditor compensation and initial public offering underpricing |
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Authors: | Xin Chang ré F Gygax Elaine Oon Hong Feng Zhang |
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Institution: | Department of Finance, Faculty of Economics and Commerce, University of Melbourne, Parkville, VIC, 3010, Australia; Nanyang Business School, Nanyang Technological University, Nanyang Avenue, Singapore 639798; School of Accounting, Economics and Finance, Deakin University, Burwood, VIC 3125, Australia |
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Abstract: | We jointly study the impact of audit quality on auditor compensation and initial public offering (IPO) underpricing using a sample of Australian firms going public over the period 1996–2003. We find that quality (Big Four) audit firms earn significantly higher fees than non-Big Four auditors, and audit quality is positively associated with IPO underpricing. The positive relation between audit quality and underpricing is more pronounced for small issues, IPOs underwritten by non-prestigious underwriters, and those that are not backed by venture capitalists. Taken together, our results suggest that quality auditors serve as a signalling device that enhances post-issue market value of equity. |
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Keywords: | Auditor quality Auditor compensation Initial public offering underpricing |
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