Auditor Choice in Commonly Owned Firms

Abstract

When a company is interconnected with other companies through common ownership, the company’s decision making is affected by common owners’ incentives to internalize externalities among investees. I argue that common owners have incentives to induce their investees to use the same auditor because it helps to internalize positive externalities arising from higher audit quality and comparability and mitigates common agency problems. Consistent with my expectation, I find that commonly owned companies are more likely to choose the same auditor. I find similar results by exploiting a quasi-experimental setting: changes in common ownership due to the acquisition of financial institutions. Further analyses reveal that investees’ use of the same auditor enables common owners to effectively monitor the auditor, which results in higher audit quality. Lastly, cross-sectional test results are consistent with common owners’ incentives and abilities affecting investees’ choice of the same auditor. My study sheds light on how common ownership, an increasingly important ownership structure, can influence investees’ financial reporting through auditor choice.