IPO underpricing issues and Audit compensation

Abstract

We investigated the relationship between the audit quality on auditor compensation IPO underpricing using a sample of firms going public. We find that Big-four audit firms earn significantly higher fees than non-Big Four auditors, and audit quality is positively associated with IPO underpricing. The positive relation between audit quality and underpricing is more pronounced for small issues and those that are not backed by venture capitalists. In sum, the results suggest that quality auditors serve as a signalling device that enhances post-issue market value of equity.