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Do Expert Informational Intermediaries Add Value? Evidence from Auditors in Microcap Initial Public Offerings

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  • Joseph Weber
  • Michael Willenborg
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    Abstract

    Do expert informational intermediaries add value? We address this question by examining the informativeness of the audit report contained in the prospectus associated with a firm's initial public offering (IPO). At the time of the IPO, there is a relative lack of information to facilitate the establishment of equity values, suggesting that the information provided by outside "experts" (e.g., auditors, underwriters) is particularly important. In this article we study small, non-venture-backed IPOs, a segment of the market with the poorest long-run performance and where the prestigious audit firm is often the sole (if any) expert present. We find that the pre-IPO opinions of larger auditors are more predictive of post-IPO negative stock delistings. Of particular note, the opinions of the national-tiered firms are comparably predictive to those of the Big 6, though this finding emerges only after we consider the selectivity-based differences in the clients that hire these national firms. Our findings also indicate that, for larger auditors the presence of a pre-IPO going-concern opinion is more strongly associated with first-year stock returns and that larger auditors are more likely to give such opinions to their distressed clients. Overall, we address a deficiency in the literature relating to "the paucity of evidence on the value of auditor opinions to investors" (Healy and Palepu [ 2001 p. 415]). Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2003.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Accounting Research.

    Volume (Year): 41 (2003)
    Issue (Month): 4 (09)
    Pages: 681-720

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    Handle: RePEc:bla:joares:v:41:y:2003:i:4:p:681-720

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    Cited by:
    1. C├ęcile Carpentier & Jean-Marc Suret, 2009. "The Survival and Success of Canadian Penny Stock IPOs," CIRANO Working Papers 2007s-28, CIRANO.
    2. Larcker, David F. & Rusticus, Tjomme O., 2010. "On the use of instrumental variables in accounting research," Journal of Accounting and Economics, Elsevier, vol. 49(3), pages 186-205, April.
    3. Kaplan, Steven E. & Williams, David D., 2012. "The changing relationship between audit firm size and going concern reporting," Accounting, Organizations and Society, Elsevier, vol. 37(5), pages 322-341.
    4. Chang, Xin & Dasgupta, Sudipto & Hilary, Gilles, 2005. "The Effect of Auditor Choice on Financing Decisions," CEI Working Paper Series 2005-10, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.

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