Behavioral spillover between firms with shared auditors: The monitoring role of capital market investors

Viet Nga Cao and Anh Viet Pham

Journal of Corporate Finance, 2021, vol. 68, issue C

Abstract: This paper examines the monitoring role of investors in the behavioral spillover between firms with shared auditors. Our context involves firms receiving U.S. Securities and Exchange Commission comment letters on issues relating to the recognition of revenue, gains, or losses (RRGL) in their 10-K filings and subsequently engaging in a higher degree of accounting conservatism. Investors of firms who did not receive a comment letter but share auditors with RRGL comment letter recipients react adversely to the release of these comment letters. Through the threat of downward stock price pressure on the value of Chief Financial Officers' equity compensation, investors induce the nonrecipients to also engage in a higher degree of accounting conservatism. When exposed to higher reputation and litigation risks, the shared auditors further contribute to the behavioral spillover between their clients by acting as informational intermediaries.

Keywords: Investors; Auditors; Spillover; SEC comment letters; Accounting conservatism (search for similar items in EconPapers)
JEL-codes: G14 G34 M41 M42 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:68:y:2021:i:c:s0929119921000353

DOI: 10.1016/j.jcorpfin.2021.101914

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