Does the monitoring effect of Big 4 audit firms really prevail? Evidence from managerial expropriation of cash assets

Pinghsun Huang, Yi-Chieh Wen () and Yan Zhang
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Pinghsun Huang: Department of Accountancy, National Cheng Kung University
Yi-Chieh Wen: National Taichung University of Science and Technology
Yan Zhang: School of Management, State University of New York at Binghamton

Review of Quantitative Finance and Accounting, 2020, vol. 55, issue 2, No 11, 739-768

Abstract: Abstract This study pins down the monitoring effect of Big 4 versus non-Big 4 audit firms on shareholder wealth by exploring the dollar equivalent of the reduction in shareholder value arising from managerial expropriation of cash assets. We detect a value discount of $0.12 for a dollar of cash assets held by non-Big 4 clients, while we uncover a value premium of $0.09 for an extra dollar of cash reserves in Big 4 clients. We further observe that second-tier auditors underperform their Big 4 rivals in containing managerial expropriation of corporate liquidity. Moreover, the economic consequences of cash and cash equivalents increase with a switch from a non-Big 4 firm to a Big 4 firm. Our results survive examinations of excessive cash assets, propensity score-matching analysis, a vast array of controls, and alternative valuation models. Collectively, our results suggest that Big 4 auditors tend to play a significantly stronger role vis-à-vis their non-Big 4 rivals in deterring managers from expropriating outside shareholders through cash resources.

Keywords: Big 4/non-Big 4 auditor; Cash assets; Monitoring effect; Wealth expropriation (search for similar items in EconPapers)
JEL-codes: G3 M4 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s11156-019-00858-9

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