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The choice of a non-Big 5 audit firm is optimal for some IPO companies. The choice of audit firm is important because auditor reputation may influence the pricing of the offering. This paper investigates the relationship between IPO underpricing and auditor compensation and proxies for non-Big 5 audit quality. We develop a continuous measure of auditor reputation based on factor analysis. This measure of auditor reputation is associated with lower IPO underpricing and higher auditor compensation, suggesting that auditor quality is an important determinant for firms hiring non-Big 5 auditors. We also examine the underlying constructs for auditor quality to determine their separate effects on IPO underpricing and auditor quality. Non-Big 5 national firms are associated with lower underpricing and higher auditor compensation, suggesting that these firms are perceived to be quality differentiated from non-national firms. SEC experience for non-national firms is associated with higher audit fees, suggesting this experience is perceived to be valuable. SUMMARYThe choice of a non-Big 5 audit firm is optimal for some initial public offering (IPO) companies. The choice of audit firm is important because auditor reputation may influence the pricing of the offering. This paper investigates the relationship between IPO underpricing and auditor compensation and proxies for non-Big 5 audit quality based on a sample of 166 offerings with non-Big 5 auditors for the period 1990-1998. We develop a continuous measure of auditor reputation based on factor analysis. Audit quality is measured as the factor score obtained from the principal components analysis of the underlying variables; whether the firm is a non-Big 5 national firm, firm size and SEC experience. We expect that underpricing is lower and auditor compensation is higher for higher quality auditors. We find that this measure of auditor reputation is associated with lower IPO underpricing and higher auditor compensation, suggesting that auditor quality is an important determinant for firms hiring non-Big 5 auditors.We also examine the underlying constructs for auditor quality to determine their separate effects on IPO underpricing and auditor compensation. We find that non-Big 5 national firms are associated with lower underpricing and higher auditor compensation, suggesting that these firms are perceived to be quality differentiated from nonnational firms. SEC experience for non-national firms is associated with higher audit fees, suggesting this experience is perceived to be valuable. This result suggests that companies are willing to pay more for an audit firm with SEC reporting experience.