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The Informational Impact of Auditor Choice

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Author Info
Sheridan Titman (Anderson School of Management)
Brett Trueman (Anderson School of Management)

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Abstract

A change in auditors is commonly observed in firms which are selling shares nationally for the first time. One impetusfor this is said to come from underwriters who advise their clients to switch from a local to national auditing firm known for higher quality standards in order to receive a higher price for the shares sold. This statement implicitly reflects the belief that the audit quality chosen by a firm's owner will convey to the market something about the firm's intrinsic value. In this paper a model is presented which gives theoretical support to this belief. Under plausible condition it is shown that owners of firms with higher true value will choose higher quality quality audits than will those in firms of lower true value. Investors, observing this relation, will then assign higher market values to those firms that choose higher quality audits.

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File URL: http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1225&context=anderson/fin
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Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number 1225.

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Date of creation: 01 Jul 1984
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Handle: RePEc:cdl:anderf:1225

Note: oai:cdlib1:anderson/fin-1225
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  1. Guasch, J Luis & Weiss, Andrew, 1980. "Wages as Sorting Mechanisms in Competitive Markets with Asymmetric Information: A Theory of Testing," Review of Economic Studies, Blackwell Publishing, vol. 47(4), pages 653-64, July. [Downloadable!] (restricted)
  2. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December. [Downloadable!] (restricted)
  3. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring. [Downloadable!] (restricted)
  4. Riley, John G., 1975. "Competitive signalling," Journal of Economic Theory, Elsevier, vol. 10(2), pages 174-186, April. [Downloadable!] (restricted)
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  5. Bhattacharya, Sudipto, 1980. "Nondissipative Signaling Structures and Dividend Policy," The Quarterly Journal of Economics, MIT Press, vol. 95(1), pages 1-24, August.
  6. Weiss, Andrew, 1983. "A Sorting-cum-Learning Model of Education," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 420-42, June. [Downloadable!] (restricted)
  7. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May. [Downloadable!] (restricted)
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  8. Spence, Michael, 1974. "Competitive and optimal responses to signals: An analysis of efficiency and distribution," Journal of Economic Theory, Elsevier, vol. 7(3), pages 296-332, March. [Downloadable!] (restricted)
  9. Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, vol. 47(2), pages 331-59, March. [Downloadable!] (restricted)
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  10. Guasch, J Luis & Weiss, Andrew, 1981. "Self-Selection in the Labor Market," American Economic Review, American Economic Association, vol. 71(3), pages 275-84, June. [Downloadable!] (restricted)
  11. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August. [Downloadable!] (restricted)
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