Uncertainty of Client Importance and Information Asymmetry

• Main Authors: CHANG, WEI-LANG, 張偉郎
• Other Authors: SHU, PEI-GI
• Format: Others
• Language: en_US
• Published: 2017
• Online Access: http://ndltd.ncl.edu.tw/handle/01884408911360908699

博士 === 輔仁大學 === 商學研究所博士班 === 105 === This study investigates whether the uncertainty of a firm’s audit-client importance affects the firm’s information asymmetry; this investigation is conducted at the audit firm and group levels by using Taiwan’s market data from 2000 to 2010. Numerous studies have attempted to explain auditor’s behavior that can be separated into two kinds of hypotheses: economic dependence and reputation concern. Auditors can affect the level of information asymmetry of their client by manipulating disclosure quality. The economic dependence hypothesis predicts that auditors who receive high audit fee from larger or influential clients may compromise their independence to maintain such clients in their portfolio. In contrast, the reputation concern hypothesis assumes that auditors are unwilling to jeopardize their independence to satisfy their clients’ demands due to concern about reputation loss or litigation costs. Empirical results show that uncertainty of client importance to an audit group is significantly and negatively related to information asymmetry, whereas uncertainty of client importance to an audit firm is no significant when other established variables are controlled for. The results suggest that the assertion of the reputation concern is empirically supported at the audit group level. It also implies the existence of economic dependence effect that a long-term stable audit-client relationship doesn’t help to decrease the level of information asymmetry. In addition, this study observes that the effect of uncertainty of client importance on information asymmetry becomes weaker with increasing firm profitability, indicating that firms with higher profitability have fewer incentives to hide information about earnings, thereby weakening the importance of auditor independence. Finally, the results are robust for addressing endogeneity concerns.