Does the Business Press Influence Equity Investors’ Perception of Big 4 Audit Quality?

Abstract

We investigate whether the business press influences equity investors’ perception of the credibility of the Big 4 for providing high-quality audits. We find that the extent of audit-related negative business press coverage of a Big 4 is associated with lower earnings response coefficients (ERC) for clients, negative client abnormal returns on the days of the news release, and a higher percentage of votes against auditor ratification. Importantly, these results are robust to controlling for other information sources such as client news, audit quality indicators (restatements and auditor litigation), and regulator press releases. Also, the extent of Big 4 negative business press coverage is associated with a lower probability of gaining new clients and a greater probability of client misstatements, suggesting that coverage is diagnostic of audit quality. The effects for ERCs and abnormal returns are concentrated in clients with low dedicated institutional ownership and high earnings uncertainty. Overall, this evidence is consistent with the business press influencing investors’ perception of Big 4 audit quality.