Product Market Threats and Auditor Choice

We examine the effect of product market threats on firms’ auditor choice. Using a measure of firm-specific product market threats, Fluidity, we find that firms facing greater competitive threats are more likely to hire big 4 auditors. This finding is robust to several sensitivity tests and supports the view that investors demand a more credible mechanism-verification by high-quality auditors-to minimize their concerns of information opaqueness arising from competitive threats. Cross-sectionally, the finding is more pronounced when institutional investors’ monitoring is impaired and in firms with greater financial misreporting likelihood but less observed in firms with greater monitoring by financial analysts. Further exploration suggests that the hiring of a big 4 auditor constrains the negative impact of product market competition on financial reporting quality. Overall, our research demonstrates how competitive threats affect firms’ behavior (in terms of an auditor appointment decision) in improving information quality.