We examine the impact of auditor choice on debt pricing in firms’ early public years when they are lesser known. Our evidence suggests that retaining a Big Six auditor, which can reduce debt-monitoring costs by enhancing the credibility of financial statements, enables young firms to lower their borrowing costs. Extant research implies that information asymmetry between borrowers and lenders is decreasing in firm age. We also provide evidence consistent with our predictions that choosing a Big Six auditor affects firms’ interest rates less over time and particularly benefits firms with short private histories that initially experience worse information problems.

This paper analyzes audit firm supervision since the Public Company Accounting Oversight Board (PCAOB) began conducting inspections. First, we find that audit clients do not perceive that the PCAOB's inspection reports are valuable for signaling audit quality. Second, we document that the information content of peer review reports fell after they became narrower in scope with the initiation of PCAOB inspections. Third, we isolate that the signaling role of peer review reports mainly stems from information that PCAOB inspectors do not publicly disclose. Collectively, our evidence implies that less is known about audit firm quality under the new regulatory regime.

Theory suggests that financial report‐based debt covenants engender incentives for the manager to relax covenant constraints through accounting choices in order to avoid costly covenant violations. Prior studies directly testing this hypothesis in the context of financial misreporting fail to find consistent evidence. Using a more refined measure of debt covenant restriction, we find that debt covenant restriction is positively associated with the probability of financial statement misstatements. This positive association is driven by performance covenants rather than capital covenants and is more consistent with the manager striving to avoid a “false‐positive” violation than to delay the violation. Our results also imply that managers resort to both income‐increasing and non–income‐increasing misreporting to relieve covenant constraints and rely more on the latter when faced with greater earnings management constraints. Additionally, the auditor charges higher audit fees to firms with more binding covenants even outside the violation state, and audit fees increase with constraints relative to both performance and capital covenants, reflecting greater financial reporting risk and bankruptcy risk, respectively. Within capital covenants, we find some evidence of even higher audit fees for tighter intangible‐inclusive versus intangible‐exclusive capital covenants. Lastly, our evidence suggests that the positive association between covenant constraints and misreporting is attenuated when the auditor has more experience with debt covenants, has greater bargaining power over the client, or faces greater litigation risk.

We examine the association between Big Five audits and the incidence of accounting frauds allegedly committed by U.S. public companies between 1981 and 2001. Many commentators argue that the prominent financial reporting failures that led to major corporate governance reforms cast serious doubt on whether the large public accounting firms continue to supply relatively high‐quality audits, especially in recent years. However, in unmatched and matched samples, we provide strong, robust evidence that fraudulent financial reporting becomes less likely with the presence of a Big Five auditor. Importantly, time‐series tests suggest that the Big Five are consistently associated with a lower incidence of fraudulent accounting, including in the last five years of our sample period when the number of frauds soared. Moreover, we find evidence implying that these relations are causal rather than an artifact of endogeneity in auditor choice.

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We rely on a unique data set to estimate the impact of disclosure standards and auditor‐related characteristics on ownership concentration in 190 privatized firms from 31 countries. Accounting transparency can help alleviate the agency conflict between minority investors and controlling shareholders, which is evident in the extent of ownership concentration, since the expropriation of corporate resources hinges on these private benefits remaining hidden. After controlling for other country‐level and firm‐level determinants, we find weak (no) evidence that extensive disclosure standards (auditor choice) reduce ownership concentration. In contrast, we report strong, robust evidence that ownership concentration is lower in countries with securities laws that specify a lower burden of proof in civil and criminal litigation against auditors, consistent with Ball's [2001] predictions. Collectively, our research implies that minority investors worldwide value legal institutions that discipline auditors in the event of financial reporting failure over both the presence of a Big 5 auditor and better disclosure standards. Re‐estimating our regressions on a broad sample of western European public firms provides similar evidence on all of our predictions.

Focusing on mandatory partner rotations, we examine the importance of within‐firm network connections to the selection of successor partners and the impact of those connections on post‐rotation audit performance. Using data from China, we track partners' history and identify incumbent‐successor connections stemming from jointly conducted prior engagements. Although these connections can enhance incumbent‐successor information transfers and thus post‐rotation audit performance, they may also pose a threat to quality by compromising the successor's independence. Among the pool of replacement candidates, we find that individuals with stronger connections with the incumbent are more likely to be appointed as successors. This finding is more pronounced when the audit engagement is more complex, client‐specific knowledge is not readily available to the succeeding partner, and the engagement is more valuable to the audit firm. We also document that successor‐incumbent connections are associated with equal or better post‐rotation audit quality and fewer client defections. These results suggest that the benefits of network‐based successor selection may outweigh its costs. By enriching our understanding of the partner transition process, this study contributes to the public policy discourse on partner rotation.