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Audit quality, auditor compensation and initial public offering underpricing

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  • Xin Chang
  • André F. Gygax
  • Elaine Oon
  • Hong Feng Zhang

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.

Suggested Citation

  • Xin Chang & André F. Gygax & Elaine Oon & Hong Feng Zhang, 2008. "Audit quality, auditor compensation and initial public offering underpricing," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(3), pages 391-416, September.
    • Handle: RePEc:bla:acctfi:v:48:y:2008:i:3:p:391-416
    DOI: 10.1111/j.1467-629X.2008.00275.x
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    1. Fouad Jamaani & Manal Alidarous, 2023. "Does the appointment of the three musketeers reduce IPO underpricing? global evidence," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 13(4), pages 887-929, December.
    2. Boudriga, Abdelkader & Ben Slama, Sarra & Boulila, Neila, 2009. "What determines IPO underpricing ? Evidence from a frontier market," MPRA Paper 18069, University Library of Munich, Germany.
    3. Rosenbusch, Nina & Brinckmann, Jan & Müller, Verena, 2013. "Does acquiring venture capital pay off for the funded firms? A meta-analysis on the relationship between venture capital investment and funded firm financial performance," Journal of Business Venturing, Elsevier, vol. 28(3), pages 335-353.
    4. Jen-Sin Lee & Yue Li & Xin Hu & Qi-An Lu, 2017. "The Relation between Initial Returns and Audits by the Big Four Accounting Firms," Applied Economics and Finance, Redfame publishing, vol. 4(4), pages 44-58, July.
    5. Habib, Ahsan & Hasan, Mostafa Monzur, 2019. "Corporate life cycle research in accounting, finance and corporate governance: A survey, and directions for future research," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 188-201.
    6. Robert E. Houmes & Terrance R. Skantz, 2010. "Highly Valued Equity and Discretionary Accruals," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(1-2), pages 60-92.
    7. Joshy,Jacob & Desai, Naman & Agarwalla, Sobhesh Kumar, 2015. "Are Big 4 Audit Fee Premiums Always Related to Superior Audit Quality? Evidence from India’s Unique Audit Market," IIMA Working Papers WP2015-03-10, Indian Institute of Management Ahmedabad, Research and Publication Department.
    8. André F. Gygax & Stephanie Ong, 2011. "What Do Investment Banks Truly Bring to the Table?," Abacus, Accounting Foundation, University of Sydney, vol. 47(2), pages 121-157, June.
    9. Jun Qi & Qinwei Chi & Ni Yang & Junyan Ouyang, 2023. "The Impact of the Tone of a Prospectus on IPO Underpricing: Evidence from China," Australian Accounting Review, CPA Australia, vol. 33(4), pages 375-390, December.
    10. Mike Siew Wei Leong & Sheela Devi Sundarasen, 2015. "Ipo Initial Returns And Volatility: A Study In An Emerging Market," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 9(3), pages 71-82.
    11. Sarra Ben Slama Zouari & Abdelkader Boudriga & Neila Boulila Taktak, 2011. "Determinants Of Ipo Underpricing: Evidence From Tunisia," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 5(1), pages 13-32.
    12. Sheela Devi Sundarasen & Afzal Khan & Nakiran Rajangam, 2018. "Signalling Roles of Prestigious Auditors and Underwriters in an Emerging IPO Market," Global Business Review, International Management Institute, vol. 19(1), pages 69-84, February.
    13. Nguyen Van Tan & Ninh Thi Trang, 2023. "The long-run performance of initial public offerings: evidence from a transition economy," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 13(5), pages 574-591.
    14. Bugeja, Martin, 2011. "Takeover premiums and the perception of auditor independence and reputation," The British Accounting Review, Elsevier, vol. 43(4), pages 278-293.
    15. Zhi-Yuan Feng & Hua-Wei Huang & Mai Dao, 2020. "U.S. Big 4 and Local Auditors in the China Initial Public Offering Market," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(04), pages 1-29, January.

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