How financial constraints intensify audit opinion shopping at the firm and partner levels: evidence from an emerging market

Purpose This paper assesses how financially constrained companies (FCCs) are motivated to practice audit opinion shopping (AOS) at both the firm and partner levels and tests how economic dynamics, including exchange rate fluctuations (ERFs) and product market competition (PMC), moderate this relationship. Design/methodology/approach This study analyzes data from companies listed on the Tehran Stock Exchange (TSE) from 2015 to 2022 using the multivariate logistic and two-stage residual inclusion (2SRI) approaches. Lennox's (2000) metric is used to estimate AOS, and financial constraints (FCs) are captured using three alternative indices comprising Kaplan and Zingales (1997) (KZ), Hadlock and Pierce (2010) (HP) and Whited and Wu (2006) (WW). Findings The findings consistently show that FCs have a positive effect on both firm- and partner-level AOS. Precisely, startups and smaller FCCs (as proxied by HP) exhibit strong propensity for firm-level AOS, whereas FCCs characterized by low cash reserves and external FCs (as proxied by KZ) show a stronger propensity for partner-level AOS. Moderation analyses also reveal that ERFs intensify partner-level AOS by KZ-induced FCCs, and while PMC directly reduces both levels of AOS, it is irrelevant to constraint-driven AOS. Finally, ancillary findings strongly indicate that large local audit firms in Iran curb firm-level AOS but, paradoxically, increase partner-level AOS. The findings are confirmed through robustness checks using alternative estimation techniques and endogeneity correction. Originality/value This study provides a novel, dual-level analysis of how FCs influence AOS behavior. It incorporates the intensity of constraints using three common FCs' alternatives. By integrating ERFs and PMC, it provides a comprehensive perspective of how the contextual forces shape client–auditor interaction.