Auditor Selection and Investment Risk

Purpose: This paper investigates the relation between the riskiness of a firm's investmentpolicies and the firm's appointment of an external auditor.Design/Methodology/Approach: Using a sample of U.S. publicly listed companies from 2004-2014, we hypothesize that firms with riskier investment policies are more likely to choose ahigher quality auditor to reduce information asymmetry and increase the credibility of financialreports. We use logit regression analysis, applying two measures of auditor quality (Big 4 andindustry specialist auditors) and four measures of investment policy risk (research anddevelopment expenditure, diversification, capital expenditures, and acquisitions).Findings: We generally find that firms with riskier investment policies choose higher qualityauditors. Specifically, firms with higher R&D expenditures and acquisitions are more likely tohire a Big 4 and/or industry specialist auditor, while firms with lower capital expenditures aremore likely to select a Big 4 auditor.Practical Implications: Our findings support the notion that management characteristics andpolicies still may have influence over external auditor selection. This may be of interest toregulators and policymakers.Originality/Value: There is only limited research examining the effect of a firm's investmentpolicies on that firm's decision