The role of audits and audit quality in valuing new issues
- 1 March 1991
- journal article
- Published by Elsevier BV in Journal of Accounting and Economics
- Vol. 14 (1), 3-49
- https://doi.org/10.1016/0167-7187(91)90057-r
Abstract
This paper provides a model in which audited reports are valuable to entrepreneurs who have private information and seek to share risks with investors. A distinctive feature of the model is that the choice of auditor and the resulting audited report provide partial information about the entrepreneur's private information, and he resolves all remaining investor uncertainty by signalling with retained ownership. The value of an audit is increasing in audit quality and the firm-specific risk faced by the entrepreneur and is a nondecreasing function of the entrepreneur's expectations about the future value of the firm.Keywords
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