External audit and bankruptcy prediction

Velia Gabriella Cenciarelli (), Giulio Greco () and Marco Allegrini ()
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Velia Gabriella Cenciarelli: University of Pisa
Giulio Greco: University of Pisa
Marco Allegrini: University of Pisa

Journal of Management & Governance, 2018, vol. 22, issue 4, No 4, 863-890

Abstract: Abstract In this paper, we investigate the relationship between external auditor characteristics and the likelihood of bankruptcy. We use a sample of US public companies to analyse whether auditor attributes are associated with default. We also test whether the inclusion of such attributes in bankruptcy prediction models improves their predictive ability. We find that firms audited by industry-expert auditors, large audit firms and long-tenured auditors are less likely to default. Firms with higher audit fees are more likely to default. Our results also show that the inclusion of auditor attributes significantly increases the predictive ability of bankruptcy prediction models. This paper contributes to the literature about auditing and bankruptcy prediction. Our results suggest that the auditor attributes can provide predictive signals concerning a default risk and that an external audit can play a relevant role in early warnings of financial distress. Our study also suggests that bankruptcy prediction models can become more effective if they are complemented with audit data. Our results are of interest to market participants, auditors, regulating authorities, banks and other financial institutions that are interested in credit risk assessment.

Keywords: Bankruptcy prediction; External audit; Auditor characteristics (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (9)

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DOI: 10.1007/s10997-018-9406-z

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