Does Personality Similarity Influence the Formation of Auditor-in-Charge–Client Relationships and Audit Quality? Evidence from Swedish Military Conscription Data

This study investigates the role of personality similarity in the formation of auditor-in-charge (AIC)–client management dyads and the development of a collaborative relationship in auditing engagements. We apply the principle of homophily from sociology, that is, the attraction of individuals with similar traits to one another, to the formation of supplier–customer dyads in auditing engagements. Our analyses suggest that AIC–management personality similarity increases the likelihood of dyad formation and facilitates client retention. Using an instrumental variable approach, we further find evidence that AIC–chief executive officer (CEO) personality similarity enhances audit quality, and that this effect is stronger for clients with higher misreporting risk and at the beginning of the AIC–client tenure relationship. Among publicly listed clients, where chief financial officer (CFO) data are available, we find that AIC–CFO personality similarity plays a more important role in AIC–client matching and audit outcomes than AIC–CEO personality similarity. Collectively, our results suggest that a personality homophily-based relationship facilitates collaboration in auditing engagements, ultimately enhancing audit quality. Overall, our evidence highlights the benefit of interpersonal relationships in the production of audit services. This paper was accepted by Ranjani Krishnan, accounting. Funding: This work was supported by the Penn State Smeal College of Business, the Handelsbanken Jan Wallanders and Tom Hedelius Foundation [Grants P25-0334 and W21-0009], the Torsten Söderbergs Foundation [Grant ET4/17], and the Mistra Center for Sustainable Markets at the Stockholm School of Economics. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.04195 .