SYNOPSIS
This study investigates whether auditors' industry specializations are valued by the capital market. By using a quasi-experimental research design, we control for the confounding effects of auditor choices, which are often found in prior studies. Specifically, we examine whether an auditor's non-restating audit clients suffer collateral damage from restatements of the same auditor's other clients. If an auditor's industry specialization is valued by the market, the contagion effect should be greater for clients of industry specialist auditors. We find that the non-restating clients of city-level industry specialists whose other clients issue restatements experience −0.8 percent abnormal returns around restatement announcements. For national industry specialists, we find negative market reaction to the auditors' non-restating clients only when the restatements convey severe negative signals. Overall, the evidence is consistent with the notion that auditors' reputations as national- and city-level specialists are priced at a premium in the capital markets.
