Lenz Ostrowski Auditor Choice By Ipo Firms In Germany 2020

This paper examines the auditor choices of all the IPOs of German firms between 1990 and 1999. The final sample consists of 306 firms.

In the IPO context, audit quality can be used as a signal about firm value (information signalling). On the other hand, it can also be used by issuers and underwriters as a means of reducing their liability and reputation risks (insurance signalling).

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Larger offerings lead to increased liability and reputation risks. Our hypotheses try to differentiate between the two audit roles.

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The empirical results demonstrate that in the German institutional context auditor choice by IPO firms seems to be dominated by 'insurance signalling', whereas 'information signalling' seems to be of minor importance. Only in the large-deal segment IPO firms with high firm-specific risk more often choose a high-quality auditor, i.e., a Big 6 firm. Our results further support the hypothesis that only in this segment do prestigious underwriters prefer Big 6 auditors.