SUMMARY

Francis (2011) calls for more research on “the effect of audit quality on economic outcomes.” We respond by examining whether high-quality auditors reduce stock price crash risk, an important consideration for stock investors. We argue that high-quality auditors reduce crash risk because of their information intermediary and corporate governance roles. Using a large sample of U.S. stocks spanning the period 1990–2009, we examine the issue empirically by using auditor industry specialization as our proxy for auditor quality. Our main finding is a statistically significant and negative association between auditor industry specialization and stock price crash risk, implying that high-quality auditors can directly benefit investors by reducing tail risk. In addition, we provide evidence that industry-specialist auditors moderate the effects of opacity, accounting conservatism, and tax avoidance on crash risk. Finally, our main finding of a negative relation between auditor industry specialization and crash risk is robust to using city-level industry specialization as an alternate measure.

JEL Classifications: G19; G32; M42.

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