Discussion on “Big N Auditors and Earnings Response Coefficients – A Comparison Study between the US and China”

Abstract

Research on auditor reputation and clients’ financial reporting quality can be traced back to Teoh and Wong’s (1993) study, which provides empirical evidence of Big 8 audit firms having higher financial reporting credibility than non-Big 8 audit firms in the US market. In their study, Du and Zhou (hereinafter, DZ) replicate Teoh and Wong (1993) using a longer and more recent sample period in the US (1983-2012)2 and China (1995-2012) to examine whether the positive association between Big N auditors and perceived audit quality (ERCs) still holds after a major regulatory intervention in early 2000 and to compare this association in the US and China. This comparison is important because China is the largest emerging economy and the second largest economy in the world. DZ’s comprehensive evidence helps us to better understand if market reaction to ERCs in China differs from that in the US. I also commend that DZ provide detailed information on the market shares of Big N auditors in the US and Chinese markets respectively during this long sample period, demonstrating that while Big N auditors play a dominant role in the US market, their market shares are much smaller in the Chinese market.