Do reputable auditors matter for informed trading?

Abstract

This paper examines whether reputable auditors affect the probability of informed trade (PIN). Using a sample of firms in an emerging market, we posit and find evidence that the PIN is lower for clients whose audit partners (audit firms) are industry specialists than for clients whose audit partners (audit firms) are not industry specialists. Additional results show that the partner’s specialization is negatively related to the magnitude of discretionary accruals, which in turn is positively associated with the level of PIN. Overall, the evidence suggests that the reputable auditors' industry specialization provides an effective mechanism through which information asymmetry is reduced. The analyses provide related policy implications.