Auditor industry specialization and decision usefulness of financial reports in an emerging market

Abstract

This paper examines the association between audit firm industry specialization and decision usefulness of accounting information, characterized as the informativeness of financial reports. To consider the endogenous specialist auditor choice, we adopt the two-stage Heckman estimation procedure, and the propensity-score matching (PSM) estimation as an additional analysis. Using a sample of firms listed in Taiwan, we find that earnings and book value of equity explain more variations in stock return and are more informative for firms audited by industry specialist auditors than for firms audited by non-specialist auditors. The results are robust with respect to alternative estimation method and empirical models, alternative definition of industry specialization, and controlling for size, financial health, and success of operating performance. The evidence suggests that the informativeness of financial reports enhanced by industry-specialized auditors provides a channel through which information asymmetry may be reduced.