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date: 26 April 2019

Abstract and Keywords

This chapter focuses on the selection of an audit firm by UK initial public offering (IPO) firms. It documents that many IPO firms switch to an audit firm in a different segment (big, midsize, or small), which suggests that IPO firms carefully select an audit firm of a particular quality level before they go public. It examines whether the selection of an auditor by IPO firms is driven by the demand for certification or insurance. The authors find that IPO firms are more likely to choose a high-quality auditor when the uncertainty of the firm’s future prospects is higher and they want to signal quality (certification driven by signaling). In addition, they find that firms with riskier IPO offerings select higher-quality auditors, in line with the insurance hypothesis. They find mixed results for the certification hypotheses when testing for the effect of auditor reputation on initial returns.

Keywords: initial public offering, IPO, auditor, certification, insurance

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