Auditor reputation and initial public offerings by foreign companies

Abstract

This study tests for a relationship between auditor reputation and underwriting fees incurred by foreign companies making an initial public offering (IPO) of equity securities in the United States during the years 1984 through 1991. The study also seeks to determine whether the companies tended to switch to internationally known auditors prior to the offering. Previous research has reported that domestic issuers incurred a smaller underwriting commission if they retained a Big Six or Big Eight audit firm when making an IPO, and that among those companies making auditor changes, there was a clear preference for the internationally known audit firms. A regression analysis indicates that. after controlling for ex ante uncertainty, economies of scale, and underwriter class, the marginal effect of auditor reputation on underwriting fees incurred by foreign companies making an IPO in the United States is not significant. Thus, the results in this paper contrast with the evidence in previous research revealing a negative association between auditor reputation and IPO underwriting fees. On the other hand, the percentage of foreign companies switching auditors just prior to going public was slightly higher than in the previous research on domestic companies.