Use of Component Auditors in Multinational Group Audits and Investment Efficiency

ABSTRACT This study examines the potential effect of using component auditors in multinational group audits (group audits) on the investment efficiency of multinational companies (MNCs). Group audits tend to negatively affect MNCs’ investment efficiency by creating an opaque information environment and impairing auditors’ monitoring efficacy. Using a sample of US MNCs, this study demonstrates a positive association between group audits and underinvestment (overinvestment) in settings prone to underinvestment (overinvestment). In other words, among MNCs that are likely to underinvest (overinvest), those with group audits underinvest (overinvest) more. Furthermore, to address the concern that using group audits may be driven by MNCs’ characteristics, propensity score matching (PSM) and entropy balancing procedures are employed to pre‐treat the sample. The results hold with using the treated samples. This study extends the literature on the effect of group audits on audit outcomes and investor's response by providing evidence that group audits can also affect business outcomes.