IDEAS home Printed from https://ideas.repec.org/a/bla/jbfnac/v51y2024i5-6p1408-1431.html

Economic demand for auditing services in the “registered” investment management industry

Author

Listed:
  • Al (Aloke) Ghosh
  • Yang Liu

Abstract

We hypothesize that the demand for auditing in the registered investment management industry arises from the auditor's ability to act as a solvent indemnifier when outside parties incur losses because of financial misrepresentations. Consistent with this insurance demand, we find that, relative to financial companies, registered investment companies are more likely to retain Big 4 auditors. Restricting the sample to the registered investment management industry, we construct three direct tests of the insurance demand hypothesis. We find that (a) the market share of a Big 4 firm is positively associated with the firm's wealth, (b) changes in audit fees are positively associated with changes in the audit firms’ wealth, and (c) net fund flows increase when clients switch from non‐Big 4 to Big 4 auditors. Our results highlight an unusually high demand for Big 4 auditors in the registered investment industry, which we attribute to the insurance demand for auditing services.

Suggested Citation

  • Al (Aloke) Ghosh & Yang Liu, 2024. "Economic demand for auditing services in the “registered” investment management industry," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 51(5-6), pages 1408-1431, May.
    • Handle: RePEc:bla:jbfnac:v:51:y:2024:i:5-6:p:1408-1431
    DOI: 10.1111/jbfa.12751
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jbfa.12751
    Download Restriction: no
    File URL: https://libkey.io/10.1111/jbfa.12751?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Dennis M. O'Reilly & Robert A. Leitch & Brad Tuttle, 2006. "An Experimental Test of the Interaction of the Insurance and Information†Signaling Hypotheses in Auditing," Contemporary Accounting Research, John Wiley & Sons, vol. 23(1), pages 267-289, March.
    2. Joseph Weber & Michael Willenborg & Jieying Zhang, 2008. "Does Auditor Reputation Matter? The Case of KPMG Germany and ComROAD AG," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 46(4), pages 941-972, September.
    3. Justin Davis & G. Tyge Payne & Gary McMahan, 2007. "A Few Bad Apples? Scandalous Behavior of Mutual Fund Managers," Journal of Business Ethics, Springer, vol. 76(3), pages 319-334, December.
    4. Palmrose, Zv, 1986. "Audit Fees And Auditor Size - Further Evidence," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 24(1), pages 97-110.
    5. Jeff L. McMullin & Bryce Schonberger, 2020. "Entropy-balanced accruals," Review of Accounting Studies, Springer, vol. 25(1), pages 84-119, March.
    6. Jong†Hag Choi & Jeong†Bon Kim & Xiaohong Liu & Dan A. Simunic, 2008. "Audit Pricing, Legal Liability Regimes, and Big 4 Premiums: Theory and Cross†country Evidence," Contemporary Accounting Research, John Wiley & Sons, vol. 25(1), pages 55-99, March.
    7. Kahle, Kathleen M. & Walkling, Ralph A., 1996. "The Impact of Industry Classifications on Financial Research," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(3), pages 309-335, September.
    8. Ole‐Kristian Hope & Pingui Rao & Yanping Xu & Heng Yue, 2023. "Information sharing between mutual funds and auditors," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(1-2), pages 152-197, January.
    9. Kathleen M. Kahle & Ralph A. Walkling, "undated". "The Impact of Industry Classifications on Financial Research," Research in Financial Economics 9607, Ohio State University.
    10. Simunic, Da, 1980. "The Pricing Of Audit Services - Theory And Evidence," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 18(1), pages 161-190.
    11. Pittman, Jeffrey A. & Fortin, Steve, 2004. "Auditor choice and the cost of debt capital for newly public firms," Journal of Accounting and Economics, Elsevier, vol. 37(1), pages 113-136, February.
    12. Sattar A. Mansi & William F. Maxwell & Darius P. Miller, 2004. "Does Auditor Quality and Tenure Matter to Investors? Evidence from the Bond Market," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 42(4), pages 755-793, September.
    13. Lys, T & Watts, Rl, 1994. "Lawsuits Against Auditors," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 32, pages 65-93.
    14. Jensen, Michael C. & Meckling, William H., 2008. "Theory of the firm: managerial behavior, agency costs and ownership structure," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 48(2), April.
    15. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    16. Karla M. Johnstone & Jean C. Bedard, 2004. "Audit Firm Portfolio Management Decisions," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 42(4), pages 659-690, September.
    17. Steve Fortin & Jeffrey A. Pittman, 2007. "The Role of Auditor Choice in Debt Pricing in Private Firms," Contemporary Accounting Research, John Wiley & Sons, vol. 24(3), pages 859-896, September.
    18. Willenborg, M, 1999. "Empirical analysis of the economic demand for auditing in the initial public offerings market," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 37(1), pages 225-238.
    19. Craswell, Allen T. & Francis, Jere R. & Taylor, Stephen L., 1995. "Auditor brand name reputations and industry specializations," Journal of Accounting and Economics, Elsevier, vol. 20(3), pages 297-322, December.
    20. Jere R. Francis & Wei Wang, 2021. "Common Auditors and Private Bank Loans," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 793-832, March.
    21. Aloke Ghosh & Steven Lustgarten, 2006. "Pricing of Initial Audit Engagements by Large and Small Audit Firms," Contemporary Accounting Research, John Wiley & Sons, vol. 23(2), pages 333-368, June.
    22. Nan‐Ting Kuo & Shu Li & Shiyun Zhai, 2022. "Institutional features and audit pricing of excess cash holdings: Do auditor liabilities beyond financial statement assurance matter?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(9-10), pages 1581-1604, October.
    23. Dye, Ronald A, 1993. "Auditing Standards, Legal Liability, and Auditor Wealth," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 887-914, October.
    24. Umit G Gurun & Noah Stoffman & Scott E Yonker, 2018. "Trust Busting: The Effect of Fraud on Investor Behavior," The Review of Financial Studies, Society for Financial Studies, vol. 31(4), pages 1341-1376.
    25. Bradley A. Goldie & Lei Li & Adi Masli, 2018. "Do Mutual Fund Investors Care About Auditor Quality?," Contemporary Accounting Research, John Wiley & Sons, vol. 35(3), pages 1505-1532, September.
    26. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    27. Aobdia, Daniel & Shroff, Nemit, 2017. "Regulatory oversight and auditor market share," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 262-287.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    2. Dang, Man & Puwanenthiren, Premkanth & Truong, Cameron & Henry, Darren & Vo, Xuan Vinh, 2022. "Audit quality and seasoned equity offerings methods," International Review of Financial Analysis, Elsevier, vol. 83(C).
    3. Cook, Jonathan & Kowaleski, Zachary T. & Minnis, Michael & Sutherland, Andrew & Zehms, Karla M., 2020. "Auditors are known by the companies they keep," Journal of Accounting and Economics, Elsevier, vol. 70(1).
    4. Ray Ball, 2009. "Market and Political/Regulatory Perspectives on the Recent Accounting Scandals," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 47(2), pages 277-323, May.
    5. El Ghoul, Sadok & Guedhami, Omrane & Pittman, Jeffrey, 2016. "Cross-country evidence on the importance of Big Four auditors to equity pricing: The mediating role of legal institutions," Accounting, Organizations and Society, Elsevier, vol. 54(C), pages 60-81.
    6. Ju Ryum Chung & Eun Jung Cho & Ho-Young Lee & Myungsoo Son, 2017. "The impact of labour unions on external auditor selection and audit scope: evidence from the Korean market," Applied Economics, Taylor & Francis Journals, vol. 49(48), pages 4833-4850, October.
    7. Louise Lu & Maiying Sui & Dongyue Wang & Yi (Ava) Wu, 2025. "The effect of auditor litigation risk on analyst coverage decisions: Evidence from a quasi‐experiment," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 65(3), pages 2517-2543, September.
    8. Omrane Guedhami & Jeffrey A. Pittman & Walid Saffar, 2014. "Auditor Choice in Politically Connected Firms," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 52(1), pages 107-162, March.
    9. Guangming Gong & Liang Xiao & Si Xu & Xun Gong, 2019. "Do Bond Investors Care About Engagement Auditors’ Negative Experiences? Evidence from China," Journal of Business Ethics, Springer, vol. 158(3), pages 779-806, September.
    10. Lin, Z. Jun & Liu, Ming, 2009. "The impact of corporate governance on auditor choice: Evidence from China," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 18(1), pages 44-59.
    11. Stefano Azzali & Tatiana Mazza, 2017. "The Association between Big4 and Cost of Debt in Private Firms," FINANCIAL REPORTING, FrancoAngeli Editore, vol. 2017(1), pages 63-82.
    12. Huq, Asif & Hartwig, Fredrik & Rudholm, Niklas, 2018. "Do audited firms have lower cost of debt?," HUI Working Papers 132, HUI Research.
    13. Asif M. Huq & Fredrik Hartwig & Niklas Rudholm, 2022. "Do audited firms have a lower cost of debt?," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 19(2), pages 153-175, June.
    14. Datta, Sudip & Gruskin, Mark & Iskandar-Datta, Mai, 2024. "Auditor certification and long-run performance of IPO stocks," Journal of Financial Stability, Elsevier, vol. 70(C).
    15. Steve Fortin & Jeffrey A. Pittman, 2007. "The Role of Auditor Choice in Debt Pricing in Private Firms," Contemporary Accounting Research, John Wiley & Sons, vol. 24(3), pages 859-896, September.
    16. Pinghsun Huang & Yi-Chieh Wen & Yan Zhang, 2020. "Does the monitoring effect of Big 4 audit firms really prevail? Evidence from managerial expropriation of cash assets," Review of Quantitative Finance and Accounting, Springer, vol. 55(2), pages 739-768, August.
    17. Ormazabal, Gaizka, 2018. "The Role of Stakeholders in Corporate Governance: A View from Accounting Research," CEPR Discussion Papers 12775, Centre for Economic Policy Research.
    18. Sattar A. Mansi & William F. Maxwell & Darius P. Miller, 2004. "Does Auditor Quality and Tenure Matter to Investors? Evidence from the Bond Market," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 42(4), pages 755-793, September.
    19. Bley, Jorg & Saad, Mohsen & Samet, Anis, 2019. "Auditor choice and bank risk taking," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 37-52.
    20. Jeong-Bon Kim & Mikhail Pevzner & Xiangang Xin, 2019. "Foreign institutional ownership and auditor choice: Evidence from worldwide institutional ownership," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(1), pages 83-110, February.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jbfnac:v:51:y:2024:i:5-6:p:1408-1431. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.