AUDITOR INDUSTRY SPECIALIZATION AND CLIENT CASH HOLDINGS: AN INFORMATION ASYMMETRY PERSPECTIVE

10.6293/AQAFA.201812_16.0005

Pei-Gi Shu；Tsung-Kang Chen；Wen-Jye Hung；Wei-Fang Hsu

Industry Specialization ； Cash Holdings ； Information Asymmetry ； Audit Quality

Advances in Quantitative Analysis of Finance and Accounting

16期（2018 / 12 / 31）

147 - 181

英文

This study investigates the effects of industry specialization on client cash holdings at the levels of audit firms, audit groups, and individual auditors, respectively, and addresses this issue from information asymmetry perspective. The empirical results of this study find that auditor industry specialization at audit groups level is positively associated with client cash holdings, indicating that the lower the auditor industry specialization, the lower cash the client need to reserve due to the economic dependence effect, thereby supporting the monitoring cost hypothesis. In contrast, auditor industry specialization at both levels of audit firms and individual auditors is negatively associated with client cash holdings, indicating low auditor industry specialization causes the client to reserve more cash due to the reputation concern, thereby supporting the investment opportunities hypothesis. In addition, we also find that information disclosure quality mitigates the effects of industry specialization on cash holdings at the audit firm and audit group levels. Finally, the results are robust when controlling for other well-known determinant variables of cash holdings and endogeneity concerns.

1. Antle, R.,Eppen, G. D.(1985).Capital rationing and organizational slack in capital budgeting.Management Science,31,163-174.
2. Bargeron, L. L.,Lehn, K. M.,Zutter, C. J.(2010).Sarbanes–Oxley and corporate risk-taking.Journal of Accounting and Economics,49(1),34-52.
3. Baskin, J.(1987).Corporate liquidity in games of monopoly power.The Review of Economics and Statistics,69,312-319.
4. Bates, T. W.,Kahle, K. M.,Stulz, R. M.(2009).Why do U.S. firms hold so much more cash than they used to?.The Journal of Finance,64,1985-2021.
5. Brown, C. D.,Raghunandan, K.(1997).Audit quality in audits of federal programs by nonfederal auditors: A reply.Accounting Horizons,11,72-75.
6. Burgstahler, D.,Dichev, I.(1997).Earnings management to avoid earnings decreases and losses.Journal of Accounting and Economics,24,99-126.
7. Casterella, J. R.,Francis, J. R.,Lewis, B. L.,Walker, P. L.(2004).Auditor industry specialization, client bargaining power, and audit pricing.Auditing: A Journal of Practice & Theory,23(1),123-140.
8. Chaney, P. K.,Jeter, D. C.,Shivakumar, L.(2004).Self-selection of auditors and audit pricing in private firms.The Accounting Review,79,51-72.
9. Chung, K. H.,Kim, J.-C.,Kim, Y.-S.,Zhang, H.(2015).Information asymmetry and corporate cash holdings.Journal of Business Finance & Accounting,42,1341-1377.
10. Craswell, A. T.,Francis, J. R.,Taylor, S. L.(1995).Auditor brand name reputations and industry specializations.Journal of Accounting and Economics,20,297-322.
11. De Beelde, I.(1997).An exploratory investigation of industry specialization of large audit firms.The International Journal of Accounting,32,337-355.
12. DeAngelo, L. E.(1981).Auditor independence, "low balling," and disclosure regulation.Journal of Accounting and Economics,3,113-127.
13. DeAngelo, L. E.(1981).Auditor size and audit quality.Journal of Accounting and Economics,3,183-199.
14. DeFond, M. L.,Francis, J. R.,Wong, T. J.(2000).Auditor industry specialization and market segmentation: Evidence from Hong Kong.Auditing: A Journal of Practice & Theory,19(1),49-66.
15. Dittmar, A.,Mahrt-Smith, J.,Servaes, H.(2003).International corporate governance and corporate cash holdings.Journal of Financial and Quantitative analysis,38,111-133.
16. Duh, R.-R.,Lee, W.-C.,Hua, C.-Y.(2009).Non-audit service and auditor independence: An examination of the Procomp effect.Review of Quantitative Finance and Accounting,32,33-59.
17. Dunn, K. A.,Mayhew, B. W.(2004).Audit firm industry specialization and client disclosure quality.Review of Accounting Studies,9,35-58.
18. Eichenseher, J. W.,Danos, P.(1981).The analysis of industry-specific auditor concentration: Towards an explanatory model.The Accounting Review,56,479-492.
19. Faulkender, M. (2002). Cash holdings among small businesses. Working paper. University of Maryland, College Park, MD.
20. Faulkender, M.,Wang, R.(2006).Corporate financial policy and the value of cash.Journal of Finance,61,1957-1990.
21. Ferguson, A.,Francis, J. R.,Stokes, D. J.(2003).The effects of firm-wide and officelevel industry expertise on audit pricing.The Accounting Review,78,429-448.
22. Ferguson, A.,Stokes, D.(2002).Brand name audit pricing, industry specialization, and leadership premiums post-Big 8 and Big 6 mergers.Contemporary Accounting Research,19,77-110.
23. Ferreira, M. A.,Vilela, A. S.(2004).Why do firms hold cash? Evidence from EMU countries.European Financial Management,10,295-319.
24. Foley, C. F.,Hartzell, J. C.,Titman, S.,Twite, G.(2007).Why do firms hold so much cash? A tax-based explanation.Journal of Financial Economics,86,579-607.
25. Gramling, A. A., Johnson, V. E., & Khurana, I. K. (2001). Audit firm industry experience and financial reporting quality. Working paper, Georgia State University, Atlanta, GA.
26. Harford, J.,Mansi, S. A.,Maxwell, W. F.(2008).Corporate governance and firm cash holdings in the US.Journal of Financial Economics,87,535-555.
27. Harris, M.,Raviv, A.(1990).Capital structure and the informational role of debt.The Journal of Finance,45,321-349.
28. Harris, M.,Raviv, A.(1996).The capital budgeting process: Incentives and information.The Journal of Finance,51,1139-1174.
29. Hayn, C.(1995).The information content of losses.Journal of Accounting and Economics,20,125-153.
30. Hogan, C. E.,Jeter, D. C.(1999).Industry specialization by auditors.Auditing: A Journal of Practice & Theory,18(1),1-17.
31. Jensen, M. C.(1989).Active investors, LBOs, and the privatization of bankruptcy.Journal of Applied Corporate Finance,2,35-44.
32. Jensen, M. C.(1986).Agency costs of free cash flow, corporate finance, and takeovers.The American Economic Review,76,323-329.
33. John, T. A.(1993).Accounting measures of corporate liquidity, leverage, and costs of financial distress.Financial Management,22(3),91-100.
34. Kandel, E.,Lazear, E. P.(1992).Peer pressure and partnerships.Journal of Political Economy,100,801-817.
35. Kim, C.-S.,Mauer, D. C.,Sherman, A. E.(1998).The determinants of corporate liquidity: Theory and evidence.The Journal of Financial and Quantitative Analysis,33,335-359.
36. Kim, J.-B.,Lee, J. J.,Park, J. C.(2015).Audit quality and the market value of cash holdings: The case of office-level auditor industry specialization.Auditing: A Journal of Practice & Theory,34(2),27-57.
37. Kim, J.-B.,Song, B. Y.,Tsui, J. S. L.(2013).Auditor size, tenure, and bank loan pricing.Review of Quantitative Finance and Accounting,40,75-99.
38. Kothari, S. P.,Leone, A. J.,Wasley, C. E.(2005).Performance matched discretionary accrual measures.Journal of Accounting and Economics,39,163-197.
39. Krishnan, G. V.(2005).The association between Big 6 auditor industry expertise and the asymmetric timeliness of earnings.Journal of Accounting, Auditing & Finance,20,209-228.
40. Kuan, T.-H.,Li, C.-S.,Chu, S.-H.(2011).Cash holdings and corporate governance in family-controlled firms.Journal of Business Research,64,757-764.
41. Kusnadi, Y.(2011).Do corporate governance mechanisms matter for cash holdings and firm value?.Pacific-Basin Finance Journal,19,554-570.
42. Lee, I.,Lochhead, S.,Ritter, J.,Zhao, Q.(1996).The costs of raising capital.Journal of Financial Research,19,59-70.
43. Lee, J.-Z.,Chen, J.-F.(2004).The effect of audit client's importance on magnitude of earnings management: From the perspective of audit groups within the big five.International Journal of Accounting Studies,38,59-80.
44. Mikkelson, W. H.,Partch, M. M.(2003).Do persistent large cash reserves hinder performance.Journal of Financial and Quantitative Analysis,38,275-294.
45. Myers, J. N.,Myers, L. A.,Omer, T. C.(2003).Exploring the term of the auditorclient relationship and the quality of earnings: A case for mandatory auditor rotation?.The Accounting Review,78,779-799.
46. Myers, S. C.(1977).Determinants of corporate borrowing.Journal of Financial Economics,5,147-175.
47. Myers, S. C.,Majluf, N. S.(1984).Corporate financing and investment decisions when firms have information that investors do not have.Journal of Financial Economics,13,187-221.
48. Opler, T.,Pinkowitz, L.,Stulz, R.,Williamson, R.(1999).The determinants and implications of corporate cash holdings.Journal of Financial Economics,52,3-46.
49. Ozkan, A.,Ozkan, N.(2004).Corporate cash holdings: An empirical investigation of UK companies.Journal of Banking & Finance,28,2103-2134.
50. Palmrose, Z.-V.(1986).Audit fees and auditor size: Further evidence.Journal of Accounting Research,24,97-110.
51. Parrino, R.,Weisbach, M. S.(1999).Measuring investment distortions arising from stockholder-bondholder conflicts.Journal of Financial Economics,53,3-42.
52. Pinkowitz, L.,Williamson, R.,Stulz, R. M.(2007).Cash holdings, dividend policy, and corporate governance: A cross-country analysis.Journal of Applied Corporate Finance,19(1),81-87.
53. Richardson, V. J.(2000).Information asymmetry and earnings management: Some evidence.Review of Quantitative Finance and Accounting,15,325-347.
54. Roberts, M. R., & Whited, T. M. (2012). Endogeneity in empirical corporate finance. Working paper, University of Pennsylvania, Philadelphia, PA.
55. Schipper, K.(1989).Commentary on earnings management.Accounting Horizons,3(4),91-102.
56. Shleifer, A.,Vishny, R. W.(1992).Liquidation values and debt capacity: A market equilibrium approach.The Journal of Finance,47,1343-1366.
57. Shu, P.-G.,Chen, T.-K.,Hung, W.-J.,Chiang, T.-L.(2013).Economic dependence and reputation concern for the audit firm, audit groups, and individual auditors-The case of Taiwan.Review of Pacific Basin Financial Markets and Policies,16,1350012.
58. Solomon, I.,Shields, M. D.,Whittington, O. R.(1999).What do industry-specialist auditors know?.Journal of Accounting Research,37,191-208.
59. Song, K. R.,Lee, Y.(2012).Long-term effects of a financial crisis: Evidence from cash holdings of East Asian firms.Journal of Financial and Quantitative Analysis,47,617-641.
60. Taiwan Economic Journal. (n.d.). Finasia: A division of Taiwan Economic Journal. Retrieved from http://www.finasia.biz/ensite/Home/tabid/90/language/zh-TW/Default.aspx
61. Tomczyk, S.,Read, W. J.(1989).Direct measurement of supplier concentration in the market for audit services.Auditing: A Journal of Practice & Theory,9(1),98-106.
62. Velury, U.,Reisch, J. T.,O’Reilly, D. M(2003).Institutional ownership and the selection of industry specialist auditors.Review of Quantitative Finance and Accounting,21(1),35-48.
63. Wallman, S. M. H.(1996).The future of accounting, part III: Reliability and auditor independence.Accounting Horizons,10(4),76-97.
64. Warfield, T. D.,Wild, J. J.,Wild, K. L.(1995).Managerial ownership, accounting choices, and informativeness of earnings.Journal of Accounting and Economics,20,61-91.
65. Williamson, O. E.(1988).Corporate finance and corporate governance.The Journal of Finance,43,567-591.

1. Yamin Wang,Wen-Jye Hung,Tsui-Lin Chiang,Jian Hua(2022).RELATIONSHIP BETWEEN ABNORMAL AUDIT FEES AND THE EARNINGS RESPONSE COEFFICIENT: AN ANALYSIS OF CHINA'S LISTED COMPANIES.Advances in Quantitative Analysis of Finance and Accounting,19,187-212.
2. Yi-Yin Ruan,Wen-Jye Hung,Tsui-Lin Chiang(2022).IS ACCOUNTANT INDUSTRY SPECIALIZATION A PANACEA? PERSPECTIVE OF FINANCIAL DISTRESS IN CHINA.Advances in Quantitative Analysis of Finance and Accounting,19,25-63.