Demand and Supply of Auditing in Ipos - an Empirical Analysis of the Quebec Market

Abstract

This study examines the factors affecting the demand for higher-quality auditors at the time of an initial public offering in a small market characterized by low-litigation risk, government subsidies for companies going public, and the presence of large non-Big Six auditors, namely, the Canadian province of Quebec. Our results, from an analysis of for 212 Quebec IPOs between 1983 and 1997, indicate that the choice of an auditor at the time of an IPO is significantly affected by the company's risk, size, and geographical dispersion. They also suggest that the Quebec audit market is segmented between three types of service providers: the Big Six, the National firms and the Local firms. Local firms audit small local companies with low risk, National firms audit large local companies with moderate risk, and Big Six audit large geographically dispersed companies with high risk.

JEL Classification: M40, G24