To Share or Not to Share: The Importance of Peer Firm Similarity to Auditor Choice

A firm’s decision on whether to choose the same auditor as a close competitor reflects a trade-off between exercising caution to protect its proprietary information and pursuing the benefits of auditor knowledge derived from providing services to comparable clients. Using a pairwise similarity measure based on descriptions from regulatory filings, we find that peer firms are more likely to engage the same auditor when their product offerings are more similar. Importantly, we find this relation is greater when the focal firm experiences more litigation risk, but is moderated when the focal firm operates in a highly competitive or innovative industry, is a market leader, or has a “cozy” relationship with its auditor. Collectively, we provide large-sample evidence that, although the upside stemming from auditor knowledge, on average, dominates the downside of greater vulnerability to information leakage, certain proprietary cost concerns motivate firms to forego the benefits of selecting a more knowledgeable auditor.