The Role of Big 4 Auditors in the Global Primary Market: Does Audit Quality Matter Most When Investors Are Protected Least?

This study examines the informational effect of audit quality on IPO underpricing in the global primary market. Using a comprehensive sample of 14,029 IPOs from 37 countries over a period of 1995 to 2014, we document that IPOs audited by Big 4 auditors are on average significantly less underpriced than those audited by non-Big 4 auditors after controlling for other determinants along with country-, industry- and year-fixed effects. When we distinguish cross-country variation in legal institutions, we show that the Big-4 effect on IPO underpricing remains significant only in countries with weak investor protection regimes. Our results are robust to the endogenous nature of auditor choice and various model specifications. Taken together, our findings support the argument that global reputation concerns drive Big 4 auditors to provide a higher level of audit quality, and the differential audit quality matters most in the IPO markets where investors are protected least. One implication of our findings is that hiring a reputable auditor may offer a viable mechanism for entrepreneurs to privately compensate for institutional constraints, thereby lowering the cost of going public.