The informational role of audit partner industry specialization

Abstract

This paper examines the effect of auditor industry specialization on the association between information asymmetry and accounting information quality. Using data from Taiwan whose audit reports are required to be signed by audit partners and controlling for the endogenous auditor choice, the results show that the audit partner industry specialization moderates the positive relation between discretionary accruals and measures of information asymmetry (i.e., bid-ask spread and analyst forecast dispersion). Moreover, this positive relation is stronger for firms whose audit partners are industry specialists than for firms whose audit firms are industry specialists. Further analysis shows that the first audit partner’s expertise itself matters more for the association between earnings quality and information asymmetry, in comparison with the expertise of audit firm alone. The results are robust to alternative estimation method and models, and alternative measures of information asymmetry, earnings quality, and industry specialists. Overall, the evidence is consistent with the audit partner’s industry specialization reducing information asymmetry via its impact on higher earnings quality. Our analyses provide policy implications in the dual-partner signature rule implemented in Taiwan.