Auditor certification and long-run performance of IPO stocks

Abstract

This study establishes a significant positive relation between high quality auditors and long-run post-IPO equity performance. IPOs associated with high-ranked auditors benefit from superior information quality irrespective of underwriter rank, manifesting in significantly better post-IPO equity performance. The auditor certification effect is robust and persists longer than the underwriter certification effect. IPOs, regardless of the underwriter rank, benefit significantly from the auditor reputation effect. Further, the auditor certification effect is more pronounced: (a) when underwriter certification is weak (‘substitution effect’), and (b) in the presence of greater information asymmetry. VC backed IPOs perform significantly better; however, VC reputation has no effect, after controlling for auditor rank and underwriter certification. Our conclusions are reinforced by a battery of robustness checks, including the use of alternative methodologies to address endogeneity, audit quality proxies, performance metrics, model specifications, and validity tests.