Does individual auditor quality contribute to firm value? Evidence from the market valuation on corporate cash holdings

Nan-Ting Kuo, Shu Li, Ya-Guang Du and Cheng-Few Lee

International Review of Economics & Finance, 2022, vol. 79, issue C, 135-153

Abstract: Our study investigates whether individual auditor quality contributes to firm value through enhancing the market valuation on corporate cash holdings. Specifically, high audit quality improves financial reporting quality that facilitates external monitoring, which deters managerial misuse and thus enhances the value of cash holdings. By exploring Chinese listed companies, we find that industry expertise at the individual auditor-level enhances the value of cash holdings, while such effect presents after controlling for audit firm-level industry expertise. Moreover, the effect of individual auditor-level industry expertise is mediated via financial reporting quality, and its effect is more pronounced when media coverage is high, when the engagement auditor is a partner, and when the economic importance of the audited client is low. Overall, our results suggest that investors recognize that expertise knowledge gained at individual auditor-level is not fully transferable among audit firms so individual auditor quality provides incremental informational value than does audit firm quality. Our study contributes to auditing literature and the policy debates about mandatory name disclosure of engagement auditors.

Keywords: Market value; Cash holdings; Individual auditor quality (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:79:y:2022:i:c:p:135-153

DOI: 10.1016/j.iref.2022.02.001

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