Do Client Characteristics Really Drive the Big N Effect?

A large literature concludes that Big N auditors provide higher audit quality than non-Big N auditors. An unresolved question, however, is whether self-selection drives this “Big N effect.” Most recently, a high profile study concludes that Propensity Score Matching (PSM) on client characteristics causes the Big N effect to disappear. We conjecture that this finding may be affected by PSM’s inherent sensitivity to its design choices. To investigate, we perform PSM tests of Big N audit quality using several commonly used audit quality measures, each employing 3,000 random combinations of three basic PSM design choices. We find that the results are sensitive to the design choices, with the majority of the models finding a Big N effect. We also find a Big N effect using an alternative matching procedure. Overall, our findings suggest that it is premature to conclude that client characteristics drive the Big N effect. Acknowledgments: This study has benefited from helpful comments by workshop participants at the University of Arizona, Boston College, the Chinese University of Hong Kong, Hong Kong University of Science and Technology, National University of Singapore, Nanyang Technological University, Temple University, and the University of Southern California. Do Client Characteristics Really Drive the Big N Effect? Evidence from Matching Methods