Auditors and Client Investment Efficiency
Mar 01, 2017
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The Accounting Review
Vol. 92, No. 2, March 2017, pp. 19-40

Gil Soo Bae and Seung Uk Choi, Dan S. Dhaliwal*, Phillip T. Lamoreaux

Gil Soo Bae and Seung Uk Choi
Korea University
Dan S. Dhaliwal*
The University of Arizona
Korea University
Phillip T. Lamoreaux
Arizona State University

This study examines the relation between auditors and their clients' investment efficiency. We hypothesize and find that auditor characteristics that proxy for an auditor's knowledge and resources are associated with higher client investment efficiency, after controlling for the auditor's effect on financial reporting quality. This result is consistent with auditors providing informational advantages to their clients in a generalized investment setting. We find that this auditor effect is more pronounced for clients who have a higher demand for information as measured by client size, industry competition, and client complexity. The effect is also more pronounced for clients of longer-tenured auditors. Overall, the results suggest that auditors may be one component to the management information environment and, as such, appear to influence capital investment behavior.

auditors, investment efficiency, auditor incentives, information environment