Re-examine The Auditor Reputation Effect: Reducing Asymmetric Information Or The Strengthen Finance Signal Hypothesis

This paper investigates the auditor reputation affects on initial returns for IPOs in China.Existing literatures suggest that high reputation auditor can effective ly reduce the informationasymmetry between the issuer and the investors, thereby reducing initial return. That is"auditor reputation effect" of "reducing asymmetric information hypothesis ".Through analyzing1069companies offering between January2007and November2012,we find that auditor reputation and initial return are positive correlation in our country.There are the features of generally low auditor credibility and extremely low allotment ratio inChina IPOs markets. On the contrary, there are high auditor credibility of international―bigfour‖accounting firms or―top ten‖accounting firms announced by the Chinese CPAAssociation. In the first day after new shares listing, investors snap up new shares of thosecompanies whose financial statements have been audited by the―big four‖or―top ten‖,pulling the first day’s closing price, resulting in a higher rate of initial return. Meanwhile,―bigfour‖accounting firms are stronger than―top ten‖accounting firms onsnapping phenomenonand pulling initial return effect. So, this paper first proposed the―auditor reputation effect "of" the strengthen finance signal hypothesis ", holding that high reputation auditors can pullinitial return.Initial public offering shares had been audited by―big four‖and―top ten‖are likely tocause herding buying, which means that investors can actively purchase those shares at thetime of initial public offering, and sell on the first day, investors can gain considerable profitin this way.