1 if client-firm is audited by a Big 4 auditor in year 0 BIG4itj = i t, otherwise; natural log of local market size, defined as the average LNGDPj = j Metropolitan Statistical Area Gross Domestic Product (GDP in millions of 2001 dollars) from years 2001 to 2005, as reported by the Bureau of Economic Analysis (U.S. Department of Commerce) natural log of the ratio , where is the number of Big 4 LNBIG4tj = NB4 auditors operating in market for year and is a small constant j t, ε (ε = 0.001) added to avoid losing observations when = 1; NB4 natural log of year-end total assets of client-firm in year ($m); LNTAitj = i t the sum of inventories and receivables scaled by year-end total INVRECitj = assets of client-firm in year i t; 1 if client-firm reported a net loss in year 0 otherwise; LOSSitj = i t, return on assets of client-firm in year ROAitj = i t; the ratio of year-end total liabilities to total assets of client-firm LEVitj = i in year t; natural log of one plus the number of reported business segments NBSitj = of client-firm in year (assumed 0 if no data available); i t the ratio of non-audit fees to total audit fees (audit fees + NASitj = fees) expensed by client-firm in year i t; 1 if client-firm is issued a qualified audit report in year 0 CONCERNitj = i t, otherwise; 1 if a different auditor from year audited client-firm in year NEWAUDitj = t-1 i 0 otherwise; t, 1 if firm fiscal year end is in December or January, 0 BUSYitj = j’s t otherwise; year and industry (2-digit SIC) fixed effects. Fixed effects = Consistent with eq. (7a), we predict the coefficient on to be positive: > 0, LNGDP β1 while the coefficient on is expected to be negative: < 0. Indeed, a BIG4*LNGDP β2
BIG4itj = 1 if client-firm i is audited by a Big 4 auditor in year t, 0 otherwise; LNGDPj = natural log of local market j size, defined as the average Metropolitan Statistical Area Gross Domestic Product (GDP in millions of 2001 dollars) from years 2001 to 2005, as reported by the Bureau of Economic Analysis (U.S. Department of Commerce) LNBIG4tj = natural log of the ratio , where NB4 is the number of Big 4 auditors operating in market j for year t, and ε is a small constant (ε = 0.001) added to avoid losing observations when NB4 = 1; LNTAitj = natural log of year-end total assets of client-firm i in year t ($m); INVRECitj = the sum of inventories and receivables scaled by year-end total assets of client-firm i in year t; LOSSitj = 1 if client-firm i reported a net loss in year t, 0 otherwise; ROAitj = return on assets of client-firm i in year t; LEVitj = the ratio of year-end total liabilities to total assets of client-firm i in year t; NBSitj = natural log of one plus the number of reported business segments of client-firm i in year t (assumed 0 if no data available); NASitj = the ratio of non-audit fees to total audit fees (audit fees + fees) expensed by client-firm i in year t; CONCERNitj = 1 if client-firm i is issued a qualified audit report in year t, 0 otherwise; NEWAUDitj = 1 if a different auditor from year t-1 audited client-firm i in year t, 0 otherwise; BUSYitj = 1 if firm j’s fiscal year end t is in December or January, 0 otherwise; Fixed effects = year and industry (2-digit SIC) fixed effects. Consistent with eq. (7a), we predict the coefficient on LNGDP to be positive: β1 > 0, while the coefficient on BIG4*LNGDP is expected to be negative: β2 < 0. Indeed, a
540_Sirois_Marmousez_Simunic.docx