Essays in Auditing and Capital Markets
This dissertation consists of three distinct but related essays examining auditing and capital markets. The first essay examines the relationship of an early audit partner experience on their subsequent audit quality and the audit fees of their public company audits. The second essay examines the impact that a firm’s geographic location has on the association of the firm’s audited earnings and its stock price. The final essay examines how a recent regulatory policy, which reduced compliance and disclosure provisions for firms undergoing an IPO, influenced the long-term audit costs of these new capital market participants. Chapter 1 investigates the question of whether good audit partners are born or groomed. I investigate whether audit partners who began their careers at a Non-Bign audit firm (i.e. Start-nBign) and took an upward career movement to a Bign audit firm can grow into high quality audit partners. Using manually hand-collected data on audit partner demographic, educational, and experiential characteristics from LinkedIn, I find that Start-nBign audit partners provide higher quality audits and are associated with higher audit and abnormal audit fees relative to those audit partners who spent their entire careers at Bign audit firms. This finding is consistent for clients switching to Start-nBign audit partners relative to those clients switching away from Start-nBign audit partners. In other analyses, I find Start-nBign partners are less likely to be busy partners and are assigned their audit firm’s most complicated clients. Overall, the findings suggest a competitive differentiation strategy by Start-nBign partners to focus on fewer, better quality audits. Chapter 2 investigates the effect of a firm’s geographic location on the association between its audited earnings and stock price; we find that rural firms’ earnings exhibit a significantly stronger association with stock price than their counterparts headquartered in central, large cities. This phenomenon is likely due to investors’ higher reliance on publicly available information for remote rural firms versus their reliance on local, private information for urban companies. We support this explanation with two distinct exogenous shocks to investor information. We also find evidence of private information leakage for urban firms relative to their rural counterparts prior to earnings announcements, and a higher information content of earnings announcements for rural companies following announcements. Taken together, our findings suggest that investors place more weight on audited earnings of rural firms due to their limited access to private information for these remote firms. Chapter 3 investigates the impact of a recent regulatory action on the long-term audit costs of Emerging Growth Companies (EGCs) during their first five years of public trading in the capital markets. The Jumpstart Our Business Startups (JOBS) Act (2012) allows EGCs, which it defines as firms with less than $1 billion in annual revenues, to have reduced disclosure/compliance. While prior research has demonstrated mixed findings of the JOBS Acts’ ability to reduce the compliance costs of going public around the IPO, we find that post-JOBS EGC firms are associated with 10 percent lower audit fees than pre-JOBS control firms over the first five years following their IPO. In subsequent tests, we find that these lower audit fees are driven by those EGCs electing “de-burdening provisions” such as exemptions from internal control audits of SOX 404(b) and provisions allowing fewer discloses of financial data and executive compensation. Overall, we find that the JOBS Act met its desired goal of reducing compliance costs for EGCs over the five years of firms’ eligibility for EGC status.
Micale, Joseph A, "Essays in Auditing and Capital Markets" (2021). ETD Collection for Fordham University. AAI28494823.