Does the monitoring effect of Big 4 audit firms really prevail? Evidence from managerial expropriation of cash assets

Pinghsun Huang, Yi Chieh Wen, Yan Zhang

Research output: Contribution to journalArticlepeer-review

Abstract

This study pins down the monitoring effect of Big 4 versus non-Big 4 audit firms on shareholder wealth by exploring the dollar equivalent of the reduction in shareholder value arising from managerial expropriation of cash assets. We detect a value discount of $0.12 for a dollar of cash assets held by non-Big 4 clients, while we uncover a value premium of $0.09 for an extra dollar of cash reserves in Big 4 clients. We further observe that second-tier auditors underperform their Big 4 rivals in containing managerial expropriation of corporate liquidity. Moreover, the economic consequences of cash and cash equivalents increase with a switch from a non-Big 4 firm to a Big 4 firm. Our results survive examinations of excessive cash assets, propensity score-matching analysis, a vast array of controls, and alternative valuation models. Collectively, our results suggest that Big 4 auditors tend to play a significantly stronger role vis-à-vis their non-Big 4 rivals in deterring managers from expropriating outside shareholders through cash resources.

Original languageEnglish
Pages (from-to)739-768
Number of pages30
JournalReview of Quantitative Finance and Accounting
Volume55
Issue number2
DOIs
Publication statusPublished - 2020 Aug 1

All Science Journal Classification (ASJC) codes

  • Accounting
  • Business, Management and Accounting(all)
  • Finance

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