Do abnormal IPO audit fees signal IPO audit quality and post-IPO performance? A principal-agent analysis based on evidence from China.

What is it about?

In this study, we focus on the initial public offering (IPO) setting in China to examine the implications of abnormal IPO audit fees. Specifically, we examine whether and how abnormal IPO audit fees can help predict IPO audit quality and post-IPO financial performance. We find that abnormal IPO audit fees are significantly and positively associated with pre-IPO earnings management and negatively associated with post-IPO financial performance, particularly for firms that switch auditors. Our results indicate that abnormally high IPO audit fees provide information content to signal a negative impact on audit quality and post-IPO financial performance. The significant incentive for gaining listing status, the special agency relationship for IPO audits and the regulatory environment of an emerging economy plausibly explain these results.

Featured Image