Andrew Ferguson
University of New South Wales
Zoltan Matolcsy
University of Technology, Sydney
Abstract: This study examines the value of audit quality in the capital markets setting. We find that clients of brand name auditors exhibit lower PEAD than small auditors, but only weak incremental auditor industry specialist effects are identified. Results also show that PEAD differs for clients of individual Big 6 / 5 auditors. In particular, clients of the smaller Big 6 / 5 auditors, Arthur Andersen and Deloittes exhibit greater PEAD than the other large auditors, consistent with the DeAngelo (1981) auditor quality size hypothesis. In addition, the newly merged PWC exhibits higher PEAD than other Big 6 / 5 firms in 1998, suggesting capital market uncertainty about the quality implications of structural change in the audit market. This suggests that inferences about auditor quality might be possible from observed capital market behaviour, which would represent an alternative to the assessment of audit quality based on arbitrary market share. thresholds.
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