Knowledge sharing via common auditors: evidence from corporate R&D investment

Abstract

Purpose Despite the importance of research and development (R&D), information on its value is not readily available to managers. This study aims to explore the role of common auditors, who audit multiple peer firms in the product market, in clients’ R&D investment decisions. This study highlights common auditors as information intermediaries who affect corporate R&D investment, focusing on the importance of knowledge resources in R&D investment and the limited ability of peers’ public information to communicate the value of R&D. Design/methodology/approach This study employs pairwise data of firm-peer-year observations to identify a common auditor who provides audit services to the focal firm and its peer firm. This study examines how a firm’s R&D investment changes when the firm’s incumbent auditor provides audit services to peers and analyzes various factors that moderate the effect of common auditors. Findings Peer firms audited by the same auditor make similar R&D investment decisions. This effect is more pronounced when the auditor specializes more in auditing R&D, when the auditor has a long-term client relationship, and when the firms exhibit a higher level of demand for incremental information relevant to R&D investment. Consistent with the beneficial role of common auditors, firms that are more responsive to auditor-provided information engage more actively in innovation activities in subsequent years. Originality/value This study deepens the understanding of how networks created by common auditors facilitate information flow among client firms and shape these firms’ R&D investment decisions.

The governance role of R&D specialist auditors: Evidence from discretionary R&D expenditure

“…To precisely capture the dynamic nature of corporate innovation, we define industries according to Hoberg and Phillips' (2016) text-based network industry classifications (TNIC), which identifies peers of each focal firm in a given year based on the similarities of product descriptions disclosed in firms' 10-K filings. The TNIC is a conceptually appealing alternative to other static industry classifications, such as the Standard Industry Classification (SIC), due to its time varying definition of industries that incorporate changes in the competitive environment and has been widely and increasingly used in recent studies (Bernard et al, 2020;Bills et al, 2020;Chang et al, 2022;Yang and Ha, 2023).…”

“…For example, auditors can share their specialized knowledge with the clients and induce the clients to make better investment decisions. As a consequence, clients sharing the same auditor exhibit more similar operating and investment decisions (Aobdia, R&D specialist auditors 2015;Yang and Ha, 2023) and are more likely to engage in efficient mergers (Cai et al, 2016;Dhaliwal et al, 2016). Auditors with specialized knowledge induce clients to make more efficient capital and R&D investments (Bae et al, 2017;Lee et al, 2023).…”