IDEAS home Printed from https://ideas.repec.org/a/eee/jaecon/v73y2022i1s0165410121000495.html
   My bibliography  Save this article

Client concerns about information spillovers from sharing audit partners

Author

Listed:
  • Kang, Jung Koo
  • Lennox, Clive
  • Pandey, Vivek

Abstract

We hypothesize that companies in the same product market avoid sharing the same audit partner when they are concerned about possible information spillovers. Consistent with our hypothesis, we find that product market rivals are less likely to share the same partner when they perceive that information spillovers are more costly. While concerns about information spillovers significantly reduce the likelihood of product market rivals sharing the same audit partner, we find that such concerns do not deter them from sharing the same audit office. Lastly, when companies are unconcerned with information spillovers, our results suggest that partner sharing can be beneficial because it can result in lower audit fees and fewer accounting misstatements.

Suggested Citation

  • Kang, Jung Koo & Lennox, Clive & Pandey, Vivek, 2022. "Client concerns about information spillovers from sharing audit partners," Journal of Accounting and Economics, Elsevier, vol. 73(1).
    • Handle: RePEc:eee:jaecon:v:73:y:2022:i:1:s0165410121000495
    DOI: 10.1016/j.jacceco.2021.101434
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165410121000495
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jacceco.2021.101434?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
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    2. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    3. Demski, Joel S, et al, 1999. "Practices for Managing Information Flows within Organizations," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(1), pages 107-131, April.
    4. Barua, Abhijit & Lennox, Clive & Raghunandan, Aneesh, 2020. "Are audit fees discounted in initial year audit engagements?," Journal of Accounting and Economics, Elsevier, vol. 69(2).
    5. Campbell, Tim S., 1979. "Abstract: Optimal Investment Financing Decisions and the Value of Confidentiality," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(4), pages 669-669, November.
    6. 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.
    7. Leonid Kogan & Dimitris Papanikolaou & Amit Seru & Noah Stoffman, 2017. "Technological Innovation, Resource Allocation, and Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(2), pages 665-712.
    8. DeFond, Mark L. & Subramanyam, K. R., 1998. "Auditor changes and discretionary accruals," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 35-67, February.
    9. Gerard Hoberg & Gordon Phillips, 2016. "Text-Based Network Industries and Endogenous Product Differentiation," Journal of Political Economy, University of Chicago Press, vol. 124(5), pages 1423-1465.
    10. Jesse A. Ellis & C. Edward Fee & Shawn E. Thomas, 2012. "Proprietary Costs and the Disclosure of Information About Customers," Journal of Accounting Research, Wiley Blackwell, vol. 50(3), pages 685-727, June.
    11. Cai, Ye & Kim, Yongtae & Park, Jong Chool & White, Hal D., 2016. "Common auditors in M&A transactions," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 77-99.
    12. Campbell, Tim S., 1979. "Optimal Investment Financing Decisions and the Value of Confidentiality," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(5), pages 913-924, December.
    13. Glaeser, Stephen, 2018. "The effects of proprietary information on corporate disclosure and transparency: Evidence from trade secrets," Journal of Accounting and Economics, Elsevier, vol. 66(1), pages 163-193.
    14. John Asker & Alexander Ljungqvist, 2010. "Competition and the Structure of Vertical Relationships in Capital Markets," Journal of Political Economy, University of Chicago Press, vol. 118(3), pages 599-647, June.
    15. Gerard Hoberg & Gordon Phillips, 2010. "Product Market Synergies and Competition in Mergers and Acquisitions: A Text-Based Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3773-3811, October.
    16. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
    17. Dhaliwal, Dan S. & Lamoreaux, Phillip T. & Litov, Lubomir P. & Neyland, Jordan B., 2016. "Shared auditors in mergers and acquisitions," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 49-76.
    18. Robert E. Verrecchia & Joseph Weber, 2006. "Redacted Disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 44(4), pages 791-814, September.
    19. Bills, Kenneth L. & Cobabe, Matthew & Pittman, Jeffrey & Stein, Sarah E., 2020. "To share or not to share: The importance of peer firm similarity to auditor choice," Accounting, Organizations and Society, Elsevier, vol. 83(C).
    20. Mark L. Defond & Clive S. Lennox, 2017. "Do PCAOB Inspections Improve the Quality of Internal Control Audits?," Journal of Accounting Research, Wiley Blackwell, vol. 55(3), pages 591-627, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hu, Zhiying & Yang, Haiyan & Zhang, Yuyu, 2022. "Shared auditors, social trust, and relationship-specific investment in the supply chain," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(3).
    2. Kang, Jung Koo, 2024. "Gone with the big data: Institutional lender demand for private information," Journal of Accounting and Economics, Elsevier, vol. 77(2).
    3. Bedford, Anna & Bugeja, Martin & Czernkowski, Robert & Bond, David, 2023. "Is the effect of shared auditors driven by shared audit partners? The case of M&As," The British Accounting Review, Elsevier, vol. 55(2).

    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. Bills, Kenneth L. & Cobabe, Matthew & Pittman, Jeffrey & Stein, Sarah E., 2020. "To share or not to share: The importance of peer firm similarity to auditor choice," Accounting, Organizations and Society, Elsevier, vol. 83(C).
    2. Lee, Eugenia Y. & Ha, Wonsuk & Park, Sunyoung, 2023. "Auditor specialization in R&D and clients’ R&D investment-q sensitivity," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(2).
    3. Moritzen, Mark Raun & Schandlbauer, Alexander, 2020. "The impact of competition and time-to-finance on corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 65(C).
    4. Xede, James & Simon Peter Dak-Adzaklo, Cephas & Ofosu, Emmanuel & Wise Dodzidenu Adza, Solomon, 2023. "Competition laws, external financing and investment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 82(C).
    5. Caleb Rawson, 2022. "Manager perception and proprietary investment disclosure," Review of Accounting Studies, Springer, vol. 27(4), pages 1493-1525, December.
    6. Glaeser, Stephen, 2018. "The effects of proprietary information on corporate disclosure and transparency: Evidence from trade secrets," Journal of Accounting and Economics, Elsevier, vol. 66(1), pages 163-193.
    7. Chui, Andy C.W. & Li, Xiao & Saffar, Walid, 2021. "National culture and the choice between bank debt and public debt," Pacific-Basin Finance Journal, Elsevier, vol. 70(C).
    8. Park, Jihwon & Sani, Jalal & Shroff, Nemit & White, Hal, 2019. "Disclosure incentives when competing firms have common ownership," Journal of Accounting and Economics, Elsevier, vol. 67(2), pages 387-415.
    9. Liang, Chuchu, 2024. "Advertising rivalry and discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 77(1).
    10. Huang, Minjie & Kubick, Thomas R. & Tseng, Kevin, 2021. "Technology spillovers and the duration of executive compensation," Journal of Banking & Finance, Elsevier, vol. 131(C).
    11. Renneboog, Luc & Vansteenkiste, Cara, 2019. "Failure and success in mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 650-699.
    12. Rahman, Dewan & Kabir, Muhammad & Oliver, Barry, 2021. "Does exposure to product market competition influence insider trading profitability?," Journal of Corporate Finance, Elsevier, vol. 66(C).
    13. Wong, Raymond M.K. & Dak-Adzaklo, Cephas Simon Peter & Lo, Agnes W.Y., 2024. "Debt choice in the regulated competition era," Journal of International Money and Finance, Elsevier, vol. 142(C).
    14. Christophe J. GODLEWSKI & Ydriss Ziane, 2008. "How many banks does it take to lend? Empirical evidence from Europe," Working Papers of LaRGE Research Center 2008-11, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    15. Ayuso, Juan & Perez, Daniel & Saurina, Jesus, 2004. "Are capital buffers pro-cyclical?: Evidence from Spanish panel data," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 249-264, April.
    16. Blomkvist, Magnus & Korkeamäki, Timo & Takalo, Tuomas, 2022. "Learning and staged equity financing," Journal of Corporate Finance, Elsevier, vol. 74(C).
    17. Anachit Bagntasarian & Emmanuel Mamatzakis, 2019. "Testing for the underlying dynamics of bank capital buffer and performance nexus," Review of Quantitative Finance and Accounting, Springer, vol. 52(2), pages 347-380, February.
    18. Belnap, Andrew, 2023. "The effect of intermediary coverage on disclosure: Evidence from a randomized field experiment," Journal of Accounting and Economics, Elsevier, vol. 75(1).
    19. Derick Beitel & Christoph J. Börner & Dirk Schiereck, 2005. "Warum beauftragen deutsche Käuferunternehmen Investmentbanken bei der Durchführung ihrer M&A-Transaktionen?," Schmalenbach Journal of Business Research, Springer, vol. 57(4), pages 283-309, June.
    20. Allee, Kristian D. & Do, Chuong & Sterin, Mikhail, 2021. "Product market competition, disclosure framing, and casting in earnings conference calls," Journal of Accounting and Economics, Elsevier, vol. 72(1).

    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:eee:jaecon:v:73:y:2022:i:1:s0165410121000495. 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: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jae .

    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.