Signing auditors’ experience and client investment efficiency

Abstract

ABSTRACT This study explores the relationship between signing auditors’ experience and client investment efficiency in the Chinese stock market. After controlling for firm-level, audit firm-level, and other individual characteristics, results show that it is signing auditors’ industry experience, rather than total experience, that significantly restrains client investment inefficiency, including over- and under-investment. This means that industry-specific experience may be the important experience affecting client investment behavior. The mechanism test results also show that experienced auditors can enhance client investment efficiency not only by playing an information role, through which they reduce over- and under-investment, but also partly through a financing channel to mitigate under-investment and a monitoring channel to restrict over-investment, respectively. Further analyses suggest that the effect of signing auditors’ industry experience on client investment efficiency is more pronounced for firms audited by large audit firms, those audited by expertise audit firms, and those located in the region with higher level of marketization. Overall, this study provides evidence related to the economic consequences of auditor experience at the individual level, thus extending the related literature.