Does Auditor Choice Matter to Foreign Investors? Evidence from Foreign Mutual Funds Worldwide

51 Pages Posted: 3 Sep 2011 Last revised: 15 Aug 2014

See all articles by Julia Chou

Julia Chou

Florida International University

Nataliya S. Zaiats

Suffolk University - Sawyer School of Management

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Date Written: March 2014

Abstract

This paper examines whether firms' auditor choice affects their ability to access foreign equity capital. Using the equity holdings of 34,837 foreign mutual funds from 28 countries, we find evidence that appointing a Big 4 auditor increases the level of foreign mutual fund ownership in firms. This link strengthens in firms with high information asymmetries and persists even at the country level. But the importance of auditor choice varies across three exogenous information events. The Big 4 effect declines after the Enron-Andersen fiasco in 2002, especially for non-U.S. firms not subject to the provisions of the Sarbanes-Oxley Act. Auditor choice and IFRS adoption play complementary roles in determining a firm's foreign ownership, and such roles are more pronounced in firms from countries with strong securities regulations and enforcement regimes. Finally, appointing Big 4 auditors is particularly important for firms to attract foreign capital during the 2008 global financial crisis.

Keywords: foreign mutual funds, auditor choice, IFRS, Enron-Andersen Collapse, and 2008 global financial crisis

JEL Classification: G11, G23, M42

Suggested Citation

Chou, Wen-Hsiu and Zaiats, Nataliya S. and Zhang, Bohui, Does Auditor Choice Matter to Foreign Investors? Evidence from Foreign Mutual Funds Worldwide (March 2014). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1921112 or http://dx.doi.org/10.2139/ssrn.1921112

Wen-Hsiu Chou

Florida International University ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Nataliya S. Zaiats

Suffolk University - Sawyer School of Management ( email )

Boston, MA 02108
United States

Bohui Zhang (Contact Author)

The Chinese University of Hong Kong, Shenzhen ( email )

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