Investor Sentiment and Audit Opinion Shopping

Abstract

The purpose of this study is to examine whether investor sentiment influences clients' propensity to engage in audit opinion shopping. Using the opinion shopping framework of Lennox (2000), we document that internal control opinion shopping is more prevalent when investor sentiment is high. This effect is concentrated among firms with low institutional ownership. We also find that clients are more likely to undertake downward switches (i.e., Big 4 to non-Big 4 auditor) when sentiment is high. Additional tests reveal that clients who engage in opinion shopping during high sentiment periods have a higher risk of material restatements and higher audit fees. As well, the market-penalty associated with opinion shopping is reduced when sentiment is high. Overall, the results suggest that firms' opinion shopping behavior during high sentiment periods is more prevalent and opportunistic. Data Availability: Data are available from public sources cited in the text.