SYNOPSIS We examine how auditor-sharing between group-affiliated IPO firms and their listed affiliates affects IPO audit quality and underpricing. Using Chinese IPOs from 2001 to 2021, we find that common auditors lead to lower IPO audit quality and higher underpricing, especially when signing audit partners are also shared. Further, listed affiliates’ annual audit quality declines after their auditor undertakes IPO audits for other group firms. However, when the shared auditor is a top ten firm, the signing partner is an industry specialist, or a top-tier underwriter is involved, shared auditors enhance audit quality and reduce underpricing, indicating that knowledge spillover can outweigh agency costs. Additionally, IPO firms sharing auditors with group affiliates perform worse in the long term. Overall, auditors’ economic dependence on group clients compromises auditor independence, raising concerns about shared arrangements and suggesting the need, in some instances, for stricter oversight of auditors serving interconnected clients. JEL Classifications: M42; G32; M41.
Guo et al. (Fri,) studied this question.
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