Audit Industry Specialization and Client Cash Holdings: An Information Asymmetry Perspective

This study investigates the effects of industry specialization on client cash holdings at the levels of audit firms, audit groups, and individual auditors, respectively, and addresses this issue from information asymmetry perspective. The empirical results of this study find that auditor industry specialization at audit groups level is positively associated with client cash holdings, indicating that the lower the auditor industry specialization, the lower cash the client need to reserve due to the economic dependence effect, thereby supporting the monitoring cost hypothesis. In contrast, auditor industry specialization at both levels of audit firms and individual auditors is negatively associated with client cash holdings, indicating low auditor industry specialization causes the client to reserve more cash due to the reputation concern, thereby supporting the investment opportunities hypothesis. In addition, we also find that information disclosure quality mitigates the effects of industry specialization on cash holdings at the audit firm and audit group levels. Finally, the results are robust when controlling for other well-known determinant variables of cash holdings and endogeneity concerns.