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• W2159447475 abstract "When subscribing newly issued stocks (Initial Public Offerings, IPO), investors are faced with the risk of adverse selection due to asymmetrical information among the relevant groups of agents involved with the issue. Furthermore, agency problems increase after the IPO. The choice of a high-quality auditor may reduce information asymmetry and agency problems. First, we analyze if IPO-firms with specific characteristics (e.g. high-risk firms, low retained ownership, underwriter reputation) choose a high audit quality as a means to reduce conflict of interests and information asymmetry. This should have a positive influence on the prices, which investors are willing to pay for newly issued shares. We then turn our attention to the question of whether investors and underwriters actually perceive different audit qualities and incorporate this perception into their decisions. We have analyzed the auditor choices of all the IPO of German firms between 1990 and 1999. The sample is comprised of 318 firms. We assume that the former Big Six auditors are perceived as high-quality firms. We found that high-risk IPOfirms are much more likely to choose a Big Six auditor than are low-risk firms. This is consistent with the predictions of Datar/Feltham/Hughes (1991). No support could be found for their conjecture that the choice of a high-quality audit firm leads to lower retained ownership. IPO-firms with lower board member ownership are more likely associated with Big 6 auditors than firms with higher board member ownership. This can be justified by signalling and agency theory considerations. Our results support the hypotheses that prestigious underwriters prefer Big 6 auditors. Furthermore, we have discovered that the above findings are dependent on the size of the IPO proceeds. It seems to be that signalling and agency reasons are only relevant for larger IPO measured by their proceeds. This means the signal “auditor choice” is more important for larger IPO due to the increasing visibility for investors and/or increasing liability or reputation risks for underwriters and issuers. The evidence presented in our study shows clearly that the choice of a high-quality auditor has no effect on underpricing or economic losses for entrepreneurs resulting from underpricing, underwriter fees, book-building-range or any other measures that attempt to capture the reaction of the capital market. On the other hand, variables that attempt to capture the “market feeling” were always important factors. The evidence we present casts some doubt on theories that argue that underpricing is a rational response to information asymmetries. The open question is: Why doesn’t it pay in Germany for investors to choose a reputable audit firm? 1 Prof. Dr. Hansrudi Lenz, Chair of Accounting, Auditing and Consulting, Department of Economics, University of Wuerzburg, Sanderring 2, D-97070 Wuerzburg (Germany). E-Mail: hansrudi.lenz@mail.uni-wuerzburg.de 2 Dr. Markus Ostrowski, SUVA Swiss Casualty Insurance, Portfolio Management, Rosslimattstrasse 39, CH-6005 Luzern. E-Mail: markus.ostrowski@suva.ch" @default.
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• W2159447475 date "2003-01-01" @default.
• W2159447475 modified "2023-09-27" @default.
• W2159447475 title "Auditor Choice by IPO-Firms and Capital Market Reactions to Auditor Choice in Germany" @default.
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