N°25-79: Auditor Stock Ownership, Investment Returns, and Audit Quality

Using a novel dataset of private stock portfolios from Swedish auditors, we provide initial empirical evidence on the extent of Big 4 auditors' ownership of individual stocks, their trading performance, and the quality of their audits. We find that individual stock ownership is widespread among Big 4 auditors, with over 50% holding shares in publicly listed Swedish companies, and that stock ownership varies with personal and professional characteristics. On average, Big 4 auditors generate positive market-adjusted returns on their investments, with some evidence of risk-adjusted outperformance, especially among audit partners and industry experts. However, Big 4 stock-owning auditors tend to issue more aggressive and less conservative audit reports and have a higher propensity for clients to meet or beat the zero earnings threshold. Collectively, our findings suggest that some Big 4 auditors can leverage their professional knowledge for private investment gains and that audit quality among these auditors may be compromised.