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Auditor Quality, Signalling, and the Valuation of Initial Public Offerings

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  • Michael Firth
  • Chee Keng Liau‐Tan

Abstract

The initial public offering (IPO) market represents a classic example of information asymmetries where the incumbent owners have good information about the value of the business but potential investors have little data to guide them on the attractiveness of the new issue. In order to mitigate these information asymmetry problems, the sponsors of the IPO will try to enhance the credibility of the share offer through various signalling mechanisms. Of interest to this study is the role that auditing firms play in adding credibility to the new issue. In particular we test some recent theoretical models of auditor choice by examining the initial public offering market in Singapore. Our empirical results show that high risk IPOs are associated with high quality auditors. Further, high quality auditors are associated with higher IPO market valuations and they allow entrepreneurs to retain lower ownership stakes in the IPO while maintaining market valuation.

Suggested Citation

  • Michael Firth & Chee Keng Liau‐Tan, 1998. "Auditor Quality, Signalling, and the Valuation of Initial Public Offerings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(1‐2), pages 145-165, January.
    • Handle: RePEc:bla:jbfnac:v:25:y:1998:i:1-2:p:145-165
    DOI: 10.1111/1468-5957.00181
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    Cited by:

    1. Bartley R. Danielsen & Robert A. Van Ness & Richard S. Warr, 2007. "Auditor Fees, Market Microstructure, and Firm Transparency," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1‐2), pages 202-221, January.
    2. Denis Cormier & Daniel Coulombe & Luania Gomez Gutierrez & Bruce J. Mcconomy, 2018. "Firms in Transition: A Review of the Venture Capital, IPO, and M&A Literature," Accounting Perspectives, John Wiley & Sons, vol. 17(1), pages 9-88, March.
    3. Catherine M. Daily & S. Trevis Certo & Dan R. Dalton & Rungpen Roengpitya, 2003. "IPO Underpricing: A Meta–Analysis and Research Synthesis," Entrepreneurship Theory and Practice, , vol. 27(3), pages 271-295, July.
    4. Li‐Ying Huang & Gene C. Lai & Erin Lu & Michael McNamara, 2020. "Auditor quality, audit fees, organizational structure, and risk taking in the US life insurance industry," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 23(2), pages 151-182, June.
    5. Jean Bédard & Daniel Coulombe & Lucie Courteau, 2008. "Audit Committee, Underpricing of IPOs, and Accuracy of Management Earnings Forecasts," Corporate Governance: An International Review, Wiley Blackwell, vol. 16(6), pages 519-535, November.
    6. Chi Duong Thi, 2023. "Audit Quality, Institutional Environments, and Earnings Management: An Empirical Analysis of New Listings," SAGE Open, , vol. 13(2), pages 21582440231, June.
    7. 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.
    8. 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.
    9. Vijay Jog & Bruce J. McConomy, 2003. "Voluntary Disclosure of Management Earnings Forecasts in IPO Prospectuses," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(1‐2), pages 125-168, January.

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