Auditor-client reciprocity: Evidence from forecast-issuing brokerage houses and forecasted companies sharing the same auditor

Abstract

We examine whether auditors share private information about some clients in their portfolio to benefit other clients (i.e., brokerage houses). This is a salient issue in China, where there are concerns about auditors leaking information to related parties, and where we observe variation in connectedness between brokerage houses and companies through shared auditors. We document that brokerage houses that share an auditor with a company issue comparatively more accurate earnings forecasts for that company. Next, cross-sectional variation in forecast accuracy is associated with several proxies for brokerage houses' and auditors' costs and incentives to share information (e.g., investor protect..