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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. Copyright (c) 2008 The Authors. Journal compilation (c) 2008 AFAANZ.

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.
  • Handle: RePEc:bla:acctfi:v:48:y:2008:i:3:p:391-416
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    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. A.K.M. Waresul Karim & Tony van Zijl & Sabur Mollah, 2013. "Impact of board ownership, CEO-Chair duality and foreign equity participation on auditor quality choice of IPO companies: Evidence from an emerging market," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 21(2), pages 148-169, May.

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