Auditor Stock Ownership, Investment Returns, and Audit Quality

Internal Seminar for Researchers

Abstract: We study what determines auditor stock ownership and investment performance, and the implications for audit quality. Using unique Swedish data on auditor stock ownership, we find that 57% percent of Swedish auditors own stocks in listed firms and that the likelihood of stock ownership increases with auditor industry expertise and risk appetite but decreases for Big 4 auditors. We also find that auditor expertise and risk appetite increase their stock investment returns, but we find no evidence of risk-adjusted outperformance. Finally, we show that audit quality is negatively related to auditor stock ownership, particularly for Big 4 auditors. These findings suggest that auditor risk tolerance increases with stock ownership, which manifests in more aggressive auditor reporting. Collectively, our findings document limited private investment benefits from auditor expertise, but stock-owning auditors are of lower quality.