Auditor and underwriter industry specialization/differentiation: evidence from IPO underpricing and long-term performance

Abstract

The dissertation examines IPO underpricing and long-term performance to assess the use of industry specialization as a differentiation strategy by audit firms and underwriters. Prior studies indicate that prestigious auditors or underwriters (e.g., Big 6 auditors) are associated with IPO underpricing. I extend existing literature by incorporating market share as a refined measure of auditor (underwriter) reputation. In particular, I define a differentiated auditor (underwriter) as the market leader that possesses significantly higher market share than their competitors in the client industry. I hypothesize that the impact of auditor (underwriter) reputation in the IPO setting depends on whether the audit firm (underwriter) has successfully differentiated itself from competitors within client industries. My results show that as audit firm (underwriter) industry market share increases without differentiation, the IPO underpricing increases. It appears that this group of auditors (underwriters) intentionally engages in high-risk IPOs in order to gain fee advantages. In contrast, differentiated auditors (underwriters) are related to lower IPO underpricing because their reputation assist in reducing information asymmetry between issuers and investors. My study is important because it shows that the benefits previously thought to be attributable to a very large set of auditors and underwriters stems primary