A Research On Relationships Between Auditor Reputation And Corporate Value

In recent years, there has been a series of major accounting scandals and audit failure occurring around the globe, which aroused great attentions from all circles on audit quality. The collapse of Arthur Andersen, as a typical case, makes the accounting quality of accounting firm and reputation mechanism the focus of researches. In the auditing market, the auditing process is completely closed, reports are presented by standard, general format, so investors can’t directly observed the auditing quality. Therefore, they tend to rely on public accounting firm brand or its reputation.However, effects of reputation on auditing quality depends on whether it has enough economic consequences, namely whether winning and maintaining high reputation will bring extra yield for the accounting firm, and in turn, whether the extra yield will benefit the auditing service receiver, and whether damage of high reputation will impact the accounting firm and the listed company. If high reputation can bring economic consequences only for the accounting firm, but have different influence to the auditing clients, it is unable to maintain this high reputation.Based on this standard, this paper studies whether the accounting firm reputation mechanism plays an effective role in the IPO market in China. Therefore, this study can be conducted thanks to the following:(1) In the theoretical sense, this article, based on the existing literature, analyzes the links between the accounting firm reputation mechanism and enterprise’s value according to our actual national conditions of the current accounting firm reputation, and discusses the likely effects the accounting firm reputation will have on corporate value, and also deduces with the help of the corresponding model. This will enrich and expand researches on the reputation of accounting firms, and will also deepen researches on relevant significance the accounting firm has in corporate governance. (2) In the practical sense, first of all, for security regulators, they should take into consideration whether the reputation of accounting firms has been established, and whether it has been improved. The establishment of market main body reputation, accounting firms as a representative, reputation mechanism is to rely on the market main body spontaneous behavior to optimize the allocation of resources, and implement the security market regulatory policies; Second, for the listed company, choosing accounting firms with sound reputation not only provide them more forceful supervision, but can also guarantee the financial report and information disclosure system, and to improve the internal management, which has great significance in improving their own management and promoting their corporate value; Finally, for accounting firms themselves, only through further improving the function of the reputation mechanism, strengthening the public accounting firm reputation capital investment can they improve the auditing quality, promote the healthy and orderly development of the industry, push the course of achieving their developing goal of becoming greater and more powerful.This paper studies the relationship between accounting firm’s reputation and enterprise’s value in the IPO market in China. There are all together six chapters, with each covering the following:Chapter1:introduction. Research background and significance are introduced here, along with the main content and the research method. This chapter also presents the whole research framework and what each chapter covers, including the expected innovation. Therefore, this chapter is the overall planning of this paper.Chapter2:literature review. This chapter initially defines and outlines the accounting firm reputation. The following study closely centers around the relationship between accounting firm reputation and corporate value including firm reputation and the first IPO pricing, firm reputation and long-term enterprise’s value, based on which a detailed analysis is conducted so that the shortcomings of the existing literature in China can be summarized and categorized. Thus, through literature review, this chapter point out the research gap, which is the premise for carrying out the research.Chapter3:theory analysis and assumption proposal. First, these four theories are analyzed:Signal transfer theory, Principal-agent theory, Insurance theory and the agent of economic responsibility theory; Second, two research hypotheses are put forward on the basis of theory analysis. They are,(1) high reputation accounting firm can reduce initial public offering enterprise’s under-pricing level, and improve the IPO pricing accuracy;(2) high reputation accounting firm can affect corporate value, achieve enhancement of corporate value.Chapter4:research design. This chapter includes variable description, sample data choice, measuring tools and the three parts of empirical research model. Among them, dependent variables, explanatory variables and manipulated variables are defined. In this article, the accounting firm’s reputation is evaluated by an average of the top public accounting firm2007-2010rank issued by the Chinese Institute of Certified Public Accountants information, presenting by a virtual variable. If the accounting firm ranks among the first eight, it is with high reputation, valued1, otherwise0. Corporate value is presented by short-term IPO pricing level, namely new pricing, and long-term corporate value. Studying on2008-2010first-issued A shares in public company data, this paper use in, rejecting those samples which do not meet the requirements, obtains505samples, where accounting firm’s reputation has an influence on IPO price and the new stock pricing, and739samples where accounting firm’s reputation affects enterprise’s middle and long-term value.Chapter5:empirical analysis. This chapter includes descriptive statistics, correlation analysis, regression analysis and robustness inspection. According to the empirical results, hypothesis1and2are verified. That is if accounting firm reputation is high, the IPO under-pricing level can be reduced, and new pricing can be more accurately reflected; high the accounting firm reputation can also affect corporate value, and help to promote the company’s value.Chapter6:empirical conclusions and policy recommendations, In this chapter, policy suggestions are proposed on the basis of empirical conclusions, and the final part is demerits and the prospect of the research. This paper puts forward three suggestions:(1) For regulators of the auditing activities, it is only by increasing the propaganda and supervision, and establishing accounting firm reputation mechanism in the capital market, that can make the auditing regulations. They are also significant means for maintenance of capital market and market economy.(2) The audit provider should establish and perfect reputation mechanism within the field. Only when reputation mechanism play an effective role will accounting firms invest more in reputation establishing, the auditing quality improved, so as to better supervise social economic activities, maintain investors’rights and interests, and guide capital flows.(3) For the audit information demanders, exploring more voluntary demand for high-quality audit service, high reputation can improve their management level and the value of their own enterprise. Only when this consciousness is formed, can auditing firm better play their legal functions and provide investors rational guidance.This paper innovates in the following ways:(1) Empirical analysis on the relationship between corporate value and accounting firm reputation is presented in the paper, which makes up the empirical research shortage in china, and provides experience data to improve the capital market function an accounting firm plays.(2) This article confirmed the function of the accounting firm reputation mechanism which provides a new concept for improving the auditing quality, setting up a credit mechanism for promoting the healthy and orderly development of China’s accounting firm, promoting fulfilling the goal of being greater and more powerful.(3) Different from previous studies, new data is adopted in this paper, and the study period is2008-2010. This conclusion can better reflect the role accounting firm reputation mechanism plays after the reform in China’s capital market and stock issuance system, and the latest influence it has in the audit market.