The Value of Big 4 Audits in Australia

24 Pages Posted: 8 Nov 2010

See all articles by Masoud Azizkhani

Masoud Azizkhani

Independent

Gary S. Monroe

University of New South Wales (UNSW) - Australian School of Business

Greg Shailer

ANU College of Business and Economics

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.

Suggested Citation

Azizkhani, Masoud and Monroe, Gary S. and Shailer, Greg, The Value of Big 4 Audits in Australia. Accounting & Finance, Vol. 50, No. 4, pp. 743-766, December 2010, Available at SSRN: https://ssrn.com/abstract=1702588 or http://dx.doi.org/10.1111/j.1467-629X.2010.00346.x

Gary S. Monroe

University of New South Wales (UNSW) - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia
+61293856443 (Phone)

Greg Shailer

ANU College of Business and Economics ( email )

Research School of Accounting
Hanna Neumann Building 21
Canberra, Australian Capital Territory 2601
Australia

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