We analyze whether information asymmetry affects three major aspects of the audit process using an instrumental variables research design that exploits exogenous increases in information asymmetry stemming from brokerage house mergers and closures. Consistent with our predictions, we find that a...

We confirm the results of prior studies that auditor tenure improves earnings quality on average. We extend their findings to show that the improvement in earnings quality resulting from longer auditor tenure is greater for firms with higher information asymmetry, after controlling for auditor's...

We study how informed, strategic trading affects audit quality and investment efficiency. With the auditor's legal liability payment based on the decrease in the market price after an audit failure, informed trading provides a hedge to the auditor against legal liability risk. This weakens...

The finance literature offers two competing possibilities on how investors respond to the quality of public financial statements in their pricing decisions. They could collect either (a) more private information to benefit from lower information collection cost or (b) less private information...

This study examines the relevance of modified audit opinions (MAO) in private debt contracting. We use the auditor's explanatory language to partition MAOs into Inconsistency opinions, resulting from an accounting change or a restatement; and Inadequacy opinions, arising from a material...

In response to Section 102(d) of the Sarbanes-Oxley Act, PCAOB Rule 2200 required annual reporting from all registered accounting firms via PCAOB Form 2. Filed for the first time during the second quarter of 2010, PCAOB Form 2 provides information about (1) each accounting firm's available human...

Many U.S. corporations operate internationally. For instance, S&P 500 firms generate approximately 29 percent of their sales in foreign markets (Brzenk 2018). Multinational corporations (MNCs) rely on information about their operations to allocate resources. This information is dispersed within...

We provide causal evidence on the agency cost explanation of the demand for high quality auditing. Using brokerage house closures/ mergers as a natural experiment to identify exogenous increases in agency costs arising from information asymmetry, we find that after experiencing exogenous...

Analyzing a large sample of non-U.S. public firms from 31 countries that obtain private loans, we find that loan syndicates that lend to borrowers that employ Big N auditors are larger and less concentrated and that the lead arrangers and largest investors of these syndicates are able to hold a...

A key goal of financial reporting is to address information asymmetries, which are amplified in the case of banks given their credit, maturity and liquidity transformation and complex, judgmental accounting standards dealing with expected credit losses (ECL). The paper explores the role of bank...