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Auditor Industry Specialization and Client Cost of Equity
Chan Li,
Qian Wang,
ABSTRACT. We examine whether investors perceive financial reports audited by industry specialized auditors to be of higher quality, as measured by reduced client-specific cost of equity capital. We investigate this association using the national and city framework. Our results show that investors perceive the financial reporting quality of companies that are audited by either city-specific industry leaders alone (not national leaders), or joint national and city industry leaders higher, as those companies have lower cost of equity capital. Clients of national industry leaders alone do not experience lower cost of equity. These findings suggest that investors’ perceptions of auditor reputation are either city-specific or jointly firm-wide and city-specific. Further analyses suggest that auditor litigation risk plays a role as large clients of industry leaders have lower cost of equity than small clients.
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