We develop and estimate a two-sided matching model of auditors and clients. We find evidence thatauditors and clients engage in matching based on their preferences on both observable and unobservablecharacteristics. This matching appears to partly explain the “Big 4 effect” on audit outcomes: after controlling for theeffects of matching, we find that the positive influence of having a Big 4 auditor on serious restatements and seriouscomment letter conversations with the SEC either weakens or disappears. Collectively, our results highlight theimportance of accounting for two-sided matching between auditors and clients in understanding the influence ofauditors on clients’ financial reporting practices.
