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Zhao Research Paper Accepted for Publication

March 20, 2017, Chelsea Kujawa

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Congratulations to Wanli Zhao, associate professor of finance, whose research titled “Audit Office Reputation Shocks from Gains and Losses of Major Industry Clients” recently was accepted for publication in the journal Contemporary Accounting Research.

Zhao’s current research is based on audits and the reasons why companies change their auditors and the importance of gaining new companies.

“We observe a significant reputation effect on the auditor office if the auditor office gains or loses a major local client,” Zhao said. “We find that other local companies are more likely to hire an auditor when the auditor office gains a new major client firm in the same industry. When the office loses a major client, then it will lose other clients in the same industry within the next two years. This ‘contagion effect’ that we document facilitates our understanding of how the dynamics of local auditing market demand for auditor expertise and reputation.”

“Certainly there are a variety of reasons that companies change their auditors, such as changes in client leadership or discontentment over an unfavorable audit opinion. However, those changes don’t trigger the other clients to follow. We find that when the switching major client is seeking a better quality of audit, other clients who closely track their peers notice the change and initiate follow-up actions.”

“Further, it turns out that losing or winning have significant spillover effects for the auditor’s business prospects. We document that auditors who become a local industry leader in the market over winning a major client will change more for new clients. After losing a major client, the auditor office will lower its fees if it loses the leader position in the market.”

“What’s the catch? Winning new business comes with a price for the new clients. After the auditor office wins a major client, it will experience a short-term capacity shortage in staffing. So even though it can charge higher fees for the new clients, the actual audit quality goes down for a couple of years. On the contrary, for companies that don’t leave an audit firm after seeing one of their industry peers leave the same auditor, their audit quality actually goes up over the next two years because the auditor office has the excess capacity to spend on fewer clients.”

Zhao joined the College of Business in fall 2012. His other research topics include corporate governance issues, such as boards of directors, financial reporting quality, executive compensation and informed trading. Zhao has published in academic journals, including Journal of Finance, The Accounting Review, Financial Management, Journal of Accounting and Public Policy, and has presented his research at universities and conferences.

Zhao obtained his MBA and doctoral degrees from Temple University in Philadelphia. Before coming to SIU, he was an assistant professor of finance at Worcester Polytechnic Institute in Massachusetts.