Stock Liquidity, Auditor Choice, and Audit Fees
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2017-08
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University of Hawaii at Manoa
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I investigate whether firms’ stock liquidity is associated with their auditor choices and audit fees. Stock liquidity can increase monitoring by helping institutional investors overcoming free-rider problems to intervene in management decisions. Stock liquidity can also facilitate block formation and costly information acquisition, which enhances corporate governance through the threat of exit by institutional investors. Given that stock liquidity can enhance corporate governance, firms with higher stock liquidity may have incentives to hire higher quality auditors and pay higher audit fees to satisfy the demand of institutional investors. Consistent with these arguments, I find that firms with liquid stocks are more likely to appoint higher quality auditors such as Big 4 and industry specialist auditors, and they also pay significantly higher audit fees. These results are robust to alternative measures of liquidity and industry specialists. These results are also robust to the control of the endogeneity of stock liquidity. This paper contributes to the accounting literature by providing empirical evidence of the role of stock liquidity on auditor choice and audit pricing.
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Stock Liquidity, Auditor Choice, Audit Fees, Corporate Governance, Institutional Monitoring
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