The effect of an audit firm's brand on security pricing

Abstract

Purpose -The purpose of this paper is to examine the demand for high quality auditors and the effect of their brand names on a security's pricing at the time of its initial public offering. Because the Thai capital market is highly regulated, especially in terms of auditor selection (i.e. the Thai Security and Exchange Commission provides a list of individually qualified auditors and underwriting firms that the issuing firms have to choose from), it is therefore of interest to look at the demand for reputable audit firms and the importance of reputation capital in the signaling mechanism. Design/methodology/approach -Data were collected from 100 issuing firms that went public between 2003 and 2008. Logistic regression and OLS regression were applied to test the relationship between the use of reputable audit firms and the level of underpricing of new issues. The demand for reputable audit firms in this highly regulated capital market is also examined. Findings -The results suggest that only the newer large firms will select the higher quality audit firms, namely the Big Four. Furthermore, the role of the audit firms in the signaling model is also examined. The findings illustrate that new security issues are underpriced less when they engage Big Four audit firms, but there is no significant association between the underwriter and the level of underpricing. However, this relationship becomes more negative when Big Four audit firms and prestigious underwriters are both employed.Research limitations/implications -The findings confirm the auditor's significant signaling role. Therefore, when the choice of an auditor and underwriter is restricted, the issuing firms should consider hiring reputable audit firms, rather than prestigious underwriters, at the time of the initial public offering. Potential investors could also use the interpretations of these findings to make rational investment decisions. Originality/value -The paper focuses on the new issues market in Thailand, which is inefficient and overly regulated.

Impact of Auditor and Underwriter Reputation on Underpricing of SME IPOs in India

“…This investors’ confidence helps in enhancing the firm’s value by reducing the information asymmetry and uncertainty regarding IPO. The negative relation between auditor’s reputation and underpricing is demonstrated by various studies such as Simunic and Stein (1987), Beatty (1989), Menon and Williams (1991), Balvers et al (1988), Gao et al (2015), Sundarasen et al (2018), and Pratoomsuwan (2012). The reason being that financial statements audited by reputable auditors build investor’s trust and confidence in the issue, enabling the company to fix higher issue price for its offerings leading to reduction in underpricing.…”

“…Since these third party professional advisors involved with issue process have huge reputational capital at stake (Megginson & Weiss, 1991), so they associate themselves with good-quality issues thereby certifying the issue and mitigating the investors’ uncertainty regarding the issue, enabling them to fetch higher issue price for the issue. Many researchers have claimed that association of reputed auditors with firm enhances the credibility of IPO among investors, thereby reducing underpricing (Balvers, McDonald, & Miller, 1988; Beatty, 1989; Gao, Cong, & Evans, 2015; Menon & Williams, 1991; Pratoomsuwan, 2012). However, the increase in credibility may increase the investors’ demand for the issue surging the closing price upwards on the first day of trading (Sundarasen, Khan, & Rajangam, 2018).…”

How discounts impact IPOs valuation performance and underpricing? A confrontation between warranted and unwarranted discounts

“…Studies document a negative correlation between underpricing and reputation, whether of underwriters or auditors (Albada et al, 2019a(Albada et al, , 2019bD. Sundarasen, 2019;Kaur and Singh, 2019;Kenourgios et al, 2007;Ong et al, 2020;Pratoomsuwan, 2012). Issuers seem to accept the costs of hiring reputable underwriters or auditors.…”

Disclosure of Audit Activities in Annual Reports: A Comparative Study of Selected Listed Companies in Botswana and South Africa

“…Internal audit functions (IAFs) are also expected to direct internal assurance planning and program execution, to deliver risk identification, and to develop monitoring and mitigation strategies (Staciokas & Rupsys, 2005). Finally, they must report to the board on decisions taken, including approval of financial statements (Pratoomsuwan, 2012). In addition to IAFs, organizational accounting functions serve a larger role in the provision of financial and associated information, albeit with the support of the other internal organization constituents such as financial controllers.…”