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The value of Big 4 audits in Australia

The value of Big 4 audits in Australia Research suggests that equity markets value Big N audits over non‐Big N audits. Explanations include the information quality hypothesis, whereby Big N auditors increase information quality, and the insurance hypothesis, whereby investors value the deeper pockets of Big N auditors. Using client firms’ex ante cost of capital as the dependent variable, we investigate whether capital market participants differentially value Big 4 versus non‐Big 4 audits in Australia and whether the value of Big 4 audits in Australia changed as a result of the audit failures of 2001–2002. We find that Big 4 audits reduce the ex ante cost of equity capital until 2001, but not after 2001. We cannot dismiss the insurance hypothesis for the persistence of the loss beyond 2003 because of the establishment of liability caps, but the demise of the Big 4 audit value for 2001–2003 is consistent with the information quality hypothesis and does not support the insurance hypothesis. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Accounting & Finance Wiley

The value of Big 4 audits in Australia

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References (113)

Publisher
Wiley
Copyright
© 2010 The Authors. Accounting and Finance © 2010 AFAANZ
ISSN
0810-5391
eISSN
1467-629X
DOI
10.1111/j.1467-629X.2010.00346.x
Publisher site
See Article on Publisher Site

Abstract

Research suggests that equity markets value Big N audits over non‐Big N audits. Explanations include the information quality hypothesis, whereby Big N auditors increase information quality, and the insurance hypothesis, whereby investors value the deeper pockets of Big N auditors. Using client firms’ex ante cost of capital as the dependent variable, we investigate whether capital market participants differentially value Big 4 versus non‐Big 4 audits in Australia and whether the value of Big 4 audits in Australia changed as a result of the audit failures of 2001–2002. We find that Big 4 audits reduce the ex ante cost of equity capital until 2001, but not after 2001. We cannot dismiss the insurance hypothesis for the persistence of the loss beyond 2003 because of the establishment of liability caps, but the demise of the Big 4 audit value for 2001–2003 is consistent with the information quality hypothesis and does not support the insurance hypothesis.

Journal

Accounting & FinanceWiley

Published: Dec 1, 2010

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