Investment opportunities, agency conflicts, contracts, and the demand for audit quality.

Persistent Link:
http://hdl.handle.net/10150/187216
Title:
Investment opportunities, agency conflicts, contracts, and the demand for audit quality.
Author:
Reed, Bradford James.
Issue Date:
1995
Publisher:
The University of Arizona.
Rights:
Copyright © is held by the author. Digital access to this material is made possible by the University Libraries, University of Arizona. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except with permission of the author.
Abstract:
This paper investigates the relation between a firm's investment opportunity set (IOS) and the demand for audit quality. This paper hypothesizes that a firm's IOS influences the demand for audit quality indirectly through the IOS's influence on the firm's agency costs. A firm's IOS is expected to influence a firm's agency costs through the IOS's influence on the nature of the firm's contracts, and through the IOS'S influence on the relationships between the firm's management and the firm's owners and creditors. The sample is comprised of those firms who were being audited by Laventhol and Horwath (LH) when LH declared bankruptcy in November of 1990. The auditors appointed to replace LH ranged from members of the big six accounting firms to regional and local auditing firms. Because of the variation in the size of the replacement auditors, these auditor-replacement choices provide a good setting to study the factors associated with the demand for audit quality. The demand for audit quality is measured by the size of the replacement auditor. Two measures of this proxy are used. The first is a dichotomous variable representing the selection of a big six/non-big six auditor as the replacement auditor. The second is a continuous variable representing the subsequent auditor's size as measured by the combined sales of the replacement auditor's clients. Results obtained in this study are supportive of quality differentiated audits using both measures of auditor size. Firm-specific factors that are found to be significant in explaining a firm's demand for audit quality are: (1) management ownership, (2) debt, (3) the type of debt (public or private), and (4) risk. Control variables of firm size and the issuance of debt and equity securities are both positively associated with the size of the replacement auditor. The existence of a bonus plan and a direct measure of the firm's IOS are not significant in explaining the size of the replacement auditor. Tests of stock price reactions surrounding the bankruptcy of LH, and to the appointment of a successor auditor provide mixed results regarding the stock market's reaction to the effect of perceived audit quality on firm value.
Type:
text; Dissertation-Reproduction (electronic)
Keywords:
Investment analysis.; Economics.
Degree Name:
Ph.D.
Degree Level:
doctoral
Degree Program:
Business Administration; Graduate College
Degree Grantor:
University of Arizona
Committee Chair:
Dhaliwal, Dan S.

Full metadata record

DC FieldValue Language
dc.language.isoenen_US
dc.titleInvestment opportunities, agency conflicts, contracts, and the demand for audit quality.en_US
dc.creatorReed, Bradford James.en_US
dc.contributor.authorReed, Bradford James.en_US
dc.date.issued1995en_US
dc.publisherThe University of Arizona.en_US
dc.rightsCopyright © is held by the author. Digital access to this material is made possible by the University Libraries, University of Arizona. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except with permission of the author.en_US
dc.description.abstractThis paper investigates the relation between a firm's investment opportunity set (IOS) and the demand for audit quality. This paper hypothesizes that a firm's IOS influences the demand for audit quality indirectly through the IOS's influence on the firm's agency costs. A firm's IOS is expected to influence a firm's agency costs through the IOS's influence on the nature of the firm's contracts, and through the IOS'S influence on the relationships between the firm's management and the firm's owners and creditors. The sample is comprised of those firms who were being audited by Laventhol and Horwath (LH) when LH declared bankruptcy in November of 1990. The auditors appointed to replace LH ranged from members of the big six accounting firms to regional and local auditing firms. Because of the variation in the size of the replacement auditors, these auditor-replacement choices provide a good setting to study the factors associated with the demand for audit quality. The demand for audit quality is measured by the size of the replacement auditor. Two measures of this proxy are used. The first is a dichotomous variable representing the selection of a big six/non-big six auditor as the replacement auditor. The second is a continuous variable representing the subsequent auditor's size as measured by the combined sales of the replacement auditor's clients. Results obtained in this study are supportive of quality differentiated audits using both measures of auditor size. Firm-specific factors that are found to be significant in explaining a firm's demand for audit quality are: (1) management ownership, (2) debt, (3) the type of debt (public or private), and (4) risk. Control variables of firm size and the issuance of debt and equity securities are both positively associated with the size of the replacement auditor. The existence of a bonus plan and a direct measure of the firm's IOS are not significant in explaining the size of the replacement auditor. Tests of stock price reactions surrounding the bankruptcy of LH, and to the appointment of a successor auditor provide mixed results regarding the stock market's reaction to the effect of perceived audit quality on firm value.en_US
dc.typetexten_US
dc.typeDissertation-Reproduction (electronic)en_US
dc.subjectInvestment analysis.en_US
dc.subjectEconomics.en_US
thesis.degree.namePh.D.en_US
thesis.degree.leveldoctoralen_US
thesis.degree.disciplineBusiness Administrationen_US
thesis.degree.disciplineGraduate Collegeen_US
thesis.degree.grantorUniversity of Arizonaen_US
dc.contributor.chairDhaliwal, Dan S.en_US
dc.contributor.committeememberSchatzberg, Jeffrey W.en_US
dc.contributor.committeememberTrombley, Mark A.en_US
dc.identifier.proquest9603363en_US
dc.identifier.oclc706137805en_US
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