Internationalization and Auditor Choice

What is it about?

Prior research shows that internationalization increases information asymmetry and conflicts of interest between managers and outside investors, which lead to greater agency problems. Agency theory predicts a demand for higher quality auditors when agency problems are more severe. This study investigates whether the extent of internationalization influences auditor choice and whether audit quality has performance implications for internationalization. Using a data set of US firms from 2003 to 2009, we find that the extent of internationalization is positively related to audit quality. Furthermore, higher quality audits positively moderate the relation between internationalization and firm performance. Taken together, these results suggest that higher quality audit mitigates the agency problem associated with internationalization.

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Why is it important?

This study contributes to the literature of international business in two ways. First, as previously indicated, the question of how multinational firms strive to manage and cope with the agency problems arising from internationalization through governance arrangements is one of the most pressing issues in the field of international management. We contribute to this stream of research by providing evidence that external auditors play an important role in resolving the potential problems inherent in firm internationalization. Second, researchers in the field of international business have long been interested in understanding the influence of internationalization on firm performance. Because prior research provides inconsistent evidence on the relation between internationalization and firm performance, extant studies on international business have shifted from simply investigating the performance implication of internationalization to identifying the contingency factors on which this relation may depend. We contribute to this stream of literature by providing evidence that audit quality plays an important moderating role in this relation.