Regulation and Opinion Shopping: Evidence from the U.S. Broker-Dealer Industry




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This study investigates the opinion shopping behavior of SEC-registered broker-dealers (BDs) and examines the changes in this behavior around recent regulatory interventions related to BD audits. Specifically, I report the following important findings. First, using a regulatory shock-based instrumental variable design (shock-IV design), I find empirical evidence suggesting that BDs successfully engage in opinion shopping. Second, BDs intensified their opinion shopping activities, at least in the short term, following the regulatory change that mandated BD auditors to register with the Public Company Accounting Oversight Board (PCAOB). Third, BD opinion shopping activities subsided to some extent after the PCAOB assumed the sole authority over the BD audit market. This effect was mainly driven by the elimination of the regulatory gap between public auditors, those who also engaged in public issuer audits and nonpublic auditors, those who do not engage in public issuer audits. Fourth, I find evidence suggesting that BD opinion shopping activities have significantly reduced after the adoption of the U.S. Securities and Exchange Commission (SEC) rules and PCAOB attestation standards for BDs in 2014. Finally, results from testing the association between BD audit opinions and Financial Industry Regulatory Authority (FINRA) enforcement actions against BDs suggest that the informational value of the internal control audit opinions has been significantly reduced after the implementation of these rules and standards.



Broker-dealer, Opinion shopping