Shareholder Rights, Corporate Governance, and Auditor Selection: Evidence from Arthur Andersen

Abstract

Grounded in agency theory, this study seeks to ascertain whether the severity of agency costs influences auditor selection among the Big Six auditors. Specifically, this article examines the association between the strength of shareholder rights and auditor choice. The evidence shows that firms where shareholder rights are weak have a tendency to select Arthur Andersen vis-à-vis the other Big Six. To the extent that Arthur Andersen represents lower audit quality, weaker shareholder rights are associated with poorer audit quality. This inclination to choose Andersen for firms with weak shareholder rights is not present, however, in regulated firms. I argue that this is because regulatory monitoring substitutes for external auditing and, hence, influences the association between shareholder rights and auditor choice.

Keywords: auditor choice, auditor selection, shareholder rights, corporate governance

JEL Classification: G30, G34