A Tale of Two Intermediaries: Investment Banker–Auditor Social Ties and IPO Quality

Abstract

Firms undertaking an initial public offering (IPO) appoint investment bankers and auditors to certify information disclosed to investors. We examine the role that alma-mater ties between the two intermediaries play in shaping audit quality. Although some evidence suggests that information transferred via education networks may enhance economic agents’ performance, other research implies that such links may admit bias into auditor judgment or impair their independence. We find that IPO firms report higher discretionary accruals when bankers and auditors are socially connected. Additional analysis suggests that this relation intensifies when issuers have stronger incentives to inflate performance, or auditors are less competent or independent. We also document that banker–auditor social ties are associated with lower earnings credibility, worse post-IPO performance, and less efficient use of the IPO proceeds. However, auditors benefit from social connections with bankers by attracting higher fee premiums and securing more future IPO-audit businesses.