Audit partner quality and stock price crash risk: evidence from an emerging market with dual-signature audits

While the relationship between high-quality audit firms and favorable capital market outcomes is well-established (Francis, 2011; Francis and Yu, 2009), the role of individual audit partners in this relationship remains less explored, particularly in unique regulatory contexts such as Iran. Recently, global reforms have aimed to increase transparency around audit partners, emphasizing their role in enhancing audit quality and, by extension, capital market outcomes. For example, the USA. PCAOB now mandates the disclosure of engagement partners through Form AP (Public Company Accounting Oversight Board, 2015), while the EU’s 2014 Audit Regulation requires the identification of key audit partners (Quick and Schmidt, 2018). Similar reforms have been implemented across Asia, including in China, Singapore and Taiwan, where signing partner disclosure has been made mandatory (Chen et al., 2010; Chi et al., 2011).

Despite these global efforts, evidence on the influence of individual auditors remains limited. Our study addresses this gap by focusing on Iran, a country with a unique regulatory and institutional context. Iran’s fragmented audit market, characterized by the absence of Big 4 dominance and the requirement for dual signatures on audit reports, provides a rare opportunity to study the effect of individual audit partners. Unlike many Western markets where firm-level reputation often overshadows individual partner quality, the Iranian system requires both a lead partner and a review partner to sign audit reports (Rajabalizadeh and Schadewitz, 2025a). This dual-signature framework offers a distinctive setting for investigating how the qualities of individual auditors influence stock price crash risk.

Prior research in markets such as China and Sweden has shown that partner-level differences – such as auditor “styles” and historical track records – significantly shape audit quality and market outcomes (Gul et al., 2013; Zerni, 2012). However, less is known about how these differences translate into capital market consequences, particularly in emerging economies. This study contributes to the literature by demonstrating that the impact of individual auditors on market outcomes is not limited to developed markets but is also a robust phenomenon in emerging economies like Iran, where audit outcomes are more heavily influenced by individual partner characteristics than by the reputation of large audit firms. Iran’s unique institutional environment, shaped by privatization, state ownership and limited media oversight (Bagherpour et al., 2014; Mirshekary and Saudagaran, 2005), further amplifies the importance of auditors’ competence in ensuring financial transparency and mitigating stock price crash risk. Further details are discussed in Section 2.

This study identifies individual audit partners through audit reports and professional websites, constructing the main variable – audit partner quality – along with controls like gender, experience, workload and client importance. Audit partner quality, measured as the audit failure rate (Wang et al., 2015; MohammadRezaei et al., 2021) and stock price crash risk, proxied by negative skewness of firm-specific returns (Kim et al., 2011a, 2011b; Hutton et al., 2009; Robin and Zhang, 2015; Callen et al., 2020), are analyzed. Regression results show a significant negative relationship, with a stronger effect for lead partners, supporting both main hypotheses. Specifically, our evidence shows that lead partner quality has a stronger influence on crash risk, reflecting their primary role in audit planning, execution and interaction with management. Review partners add oversight but cannot fully offset a low-quality lead partner, consistent with prior findings (Wang et al., 2015). This role differentiation underscores that audit quality is not evenly produced within the team – the lead partner’s expertise is pivotal. Such insight aligns with regulatory moves to disclose or monitor engagement partners (Defond and Lennox, 2017).

The primary findings are reinforced by several additional analyses. First, consistent with DeAngelo (1981) and Wang et al. (2020), audit partner quality more strongly reduces crash risk in firms with high agency costs. Second, the effect is stronger in low-concentration SOEs, suggesting that governance structures influence audit effectiveness. Third, following Callen et al. (2020), partners from larger audit firms show a stronger crash risk reduction, highlighting the role of firm-level support. Furthermore, the results remain robust when using alternative proxies of audit quality – discretionary accruals and audit report modifications – confirming the consistency of the main findings. Finally, the conclusions hold under alternative model specifications, fixed effects estimations and two-stage least squares (2SLS) instrumental variable tests addressing potential endogeneity concerns.

This study makes several contributions to the auditing and corporate governance literature. First, it extends stock price crash risk research by focusing on audit partner quality and distinguishing the roles of lead and review partners within Iran’s dual-signature system (Rajabalizadeh and Schadewitz, 2025a). From a role theory perspective, this highlights how differentiated responsibilities between engagement and review partners translate into different market consequences. Second, it fills a gap by showing how partner-level attributes, often overlooked compared to factors like analyst coverage (Xu et al., 2013), CSR (Kim et al., 2014; Lee et al., 2019b) and internal controls (Chen et al., 2017; Kim et al., 2019), influence audit outcomes. In doing so, it contributes to the emerging behavioral auditing literature, which emphasizes that individual auditors’ skills, ethics and behavioral styles can shape financial reporting outcomes.

Third, it offers evidence from an emerging, fragmented audit market (Azizkhani et al., 2022; MohammadRezaei et al., 2016). Iran’s absence of Big 4 firms and mandatory dual-partner audit structure provide a rare natural laboratory where auditor-specific effects can be isolated without the confounding influence of global firm reputations. This unique context allows us to disentangle partner quality from firm-level brand credibility, offering insights into the micro-level drivers of audit quality that are often masked in USA and European settings. Finally, by integrating ownership structure, it highlights how partner quality addresses agency problems in state-controlled or concentrated firms (Mirshekary and Saudagaran, 2005). Consistent with agency theory (Jensen and Meckling, 1976), our findings suggest that high-quality auditors mitigate information asymmetry by constraining opportunism, thereby lowering the likelihood of bad-news hoarding and stock price crashes. Taken together, the findings provide generalizable evidence that individual auditors matter for market stability: capable partners can substitute for the absence of global brands by upholding transparency, while low-quality auditors pose risks even in highly regulated environments.

The remainder of this article is structured as follows: Section 2 discusses Iran’s audit and capital market structure. Section 3 presents the theories, literature review and hypothesis development. Section 4 covers the sample, measurements, data and model construction. Section 5 reports the main results. Section 6 presents additional tests and addresses endogeneity issues. Section 7 concludes the study. Finally, Section 8 presents limitations and future research directions.

Iran’s unique socio-economic and regulatory environment offers a highly relevant context to study the link between audit partner quality and stock price crash risk. With limited media coverage, concentrated ownership and concerns over disclosure reliability (Mirshekary and Saudagaran, 2005; Ensaf et al., 2025; Rajabalizadeh and Schadewitz, 2025b), audited financial statements become especially crucial, elevating the role of individual auditors in shaping financial transparency and crash risk outcomes.

First, the formation of the Iranian Association of Certified Public Accountants in 2001 expanded the private audit sector (Bagherpour et al., 2014; Azizkhani et al., 2022). However, the audit market remains fragmented and Big 4 firms are legally barred from operating (MohammadRezaei et al., 2016). This fragmented environment, marked by intense domestic competition, creates substantial variation in partner-level audit quality, offering a distinctive opportunity to study how individual auditor characteristics influence stock price crash risk in a setting where firm reputation plays a smaller role.

Second, Iran’s institutional environment – characterized by weak enforcement, dominant state ownership and ongoing economic reforms – limits external monitoring mechanisms. As a result, investors, banks and minority shareholders rely heavily on auditor signals to assess firm performance (Azizkhani et al., 2022). Prior evidence shows that Iranian investors respond to audit quality cues (Hajiha and Ebrahimi, 2016; Baghoomian et al., 2017), further highlighting the importance of studying audit partner quality’s impact on stock price crash risk in this context.

Third, Iran’s auditing framework requires dual signatures from both a lead and a review partner on audit reports (Rajabalizadeh and Schadewitz, 2025a). The lead partner directs the audit engagement, while the review partner independently assesses and challenges critical audit judgments (Epps and Messier, 2007; Lee and Levine, 2020). This dual-signature requirement enhances accountability and creates a unique institutional setting to isolate individual partner effects beyond firm-level influences. In China, the regulatory environment also mandates two signing partners for audit reports (Lennox et al., 2014; Dou et al., 2024; Firth et al., 2012), with a lead partner and a review partner, both of whom share legal liability (Chinese Auditing Standards on CPAs No. 1501, 2017). Following a series of financial scandals in the early 2000s, China implemented mandatory audit partner rotation to enhance independence (Gul et al., 2013), reflecting similar concerns regarding long-term auditor-client relationships as in Iran.

Taiwan’s dual-signature requirement mirrors this structure, with the lead partner overseeing audit execution and the concurring partner reviewing judgments (Chi et al., 2009; Lee et al., 2017; He and Rivai, 2024). Taiwan’s system ensures equal legal responsibility for both partners, regardless of their respective roles (Schneider and Messier, 2007). Further, studies from Taiwan suggest that co-working experience between lead and concurring partners can influence audit quality, showing the critical role of interpersonal dynamics in audit effectiveness (Huang et al., 2022). These findings align with dual-signature systems found in France, Denmark and Sweden, where joint audit arrangements or mandatory dual partner signings have been used historically to promote independent oversight (Francis et al., 2009; Ittonen and Trønnes, 2015). These international examples provide a comparative backdrop for understanding the dynamics of dual-signature audit systems and their role in enhancing audit quality and reducing crash risk.

Finally, recognizing that conventional audit quality proxies often fail to fully capture individual auditor performance (Francis, 2011), we use the audit failure rate (AFR) – the number of audit failures divided by the total number of audits signed – as a direct partner-level measure of quality (Goodwin and Wu, 2016; Lee et al., 2019a). Following Wang et al. (2015) and MohammadRezaei et al. (2021), we use (1–AFR) to reflect auditor effectiveness. Combined with Iran’s dual-signature system, this outcome-based measure provides a robust foundation to examine the relationship between audit partner quality and stock price crash risk.

The relationship between audit partner quality and stock price crash risk can be understood through several complementary theoretical perspectives. Agency theory (Jensen and Meckling, 1976) and the information asymmetry framework (Healy and Palepu, 2001) posit that managers may strategically withhold bad news to protect private benefits, thereby increasing the likelihood of sudden stock price crashes when accumulated negative information is eventually released (Hutton et al., 2009). High-quality auditors mitigate this risk by constraining earnings management, promoting timely loss recognition and enhancing the credibility and transparency of financial reporting (DeAngelo, 1981; Khurana and Raman, 2004). In this view, stronger audit partner quality reduces information asymmetry and limits managerial bad-news hoarding, thereby lowering the probability of extreme downside stock price movements.

Behavioral auditing research further emphasizes that audit quality is shaped not only by firm-level policies and structures but also by individual auditors’ psychological, cognitive and experiential attributes that influence professional judgment and decision-making (Nelson and Tan, 2005; Hurtt et al., 2013; Griffith et al., 2016; Francis, 2011). Partner-level differences in cognitive style, experience and professional skepticism affect how auditors interpret client signals, assess risk and exercise judgment under uncertainty (Svanberg and Öhman, 2013). These individual characteristics, combined with situational pressures such as workload and client importance, generate meaningful variation in audit outcomes across partners (DeFond and Zhang, 2014). Extending this perspective, prior studies show that auditor traits such as conscientiousness, openness and professional skepticism are associated with higher audit quality and reduced misreporting (Gul et al., 2013; Samagaio and Felício, 2022), while interpersonal dynamics and team interactions further shape audit effectiveness (Friska and Agustia, 2025). Taken together, this literature suggests that audit partner quality – reflecting both technical competence and behavioral discipline – should play a critical role in mitigating stock price crash risk.

In Iran’s fragmented audit market, the role of individual audit partners is expected to be particularly pronounced. The absence of Big 4 audit firms, combined with limited external monitoring and media scrutiny, increases reliance on auditors as key information intermediaries (Azizkhani et al., 2022; MohammadRezaei et al., 2016). Moreover, Iran’s mandatory dual-signature audit system enhances individual accountability at the partner level, reducing the scope for reputation-based complacency and reinforcing incentives to maintain high audit quality. Prior research demonstrates that individual audit partners meaningfully influence audit outcomes and capital market consequences beyond firm-level reputation effects (Francis, 2011; Zerni, 2012; Aobdia et al., 2015). Accordingly, in this institutional setting, higher audit partner quality should constrain managerial opportunism, improve the timeliness of bad-news disclosure and reduce the likelihood of stock price crashes ^[1]. Based on the above arguments, we propose the following hypotheses:

The distinction between lead and review partners is central to Iranian audit engagements. Lead partners have primary responsibility for audit planning, risk assessment and key judgment calls, as well as direct interaction with client management (McCracken et al., 2008; Rajabalizadeh and Schadewitz, 2025a). In contrast, review partners play a secondary oversight role, focusing on evaluating audit judgments, compliance and evidence sufficiency (Epps and Messier, 2007). Because the lead partner’s decisions more directly shape audit execution and reporting outcomes, the quality of the lead partner is expected to exert a stronger crash-risk–reducing effect than that of the review partner, leading to H2.

The sample for this study consists of firms listed on the Tehran Stock Exchange (TSE). Data was extracted from the Codal database, which provides comprehensive financial and accounting information in Iran. The data set includes 481 audit partners from 141 audit firms who served 207 client firms over the period from 2011 to 2024. The data collection and sample refinement process are summarized in Table 1.

Following prior literature (Kim et al., 2011a, 2011b; Robin and Zhang, 2015; Hutton et al., 2009; Callen et al., 2020; Wang et al., 2020; Fan and Xu, 2022; Shelih and Wang, 2024; Chen et al., 2024), we measure stock price crash risk (SPCR) using four widely used proxies to capture different dimensions of crash risk.

NCSKEW: Negative skewness of firm-specific weekly returns over the fiscal year is calculated. Weekly returns are derived using a regression model that explains how stock price changes relate to market returns. The skewness of these residuals (unexplained by the market) is then computed to assess crash risk.

DUVOL: This measure captures the volatility asymmetry between negative and positive return weeks. It is defined as the log ratio of standard deviations of down-week to up-week returns, reflecting how negative shocks are often more volatile than positive returns.

CRASH: This binary variable is set to 1 if a firm experiences a weekly return falling more than 3.09 standard deviations below the mean, signaling an extreme crash event. If no such event occurs, it is set to 0.

COUNT: This count measures the number of extreme negative returns (over 3.09 standard deviations below the mean) in a fiscal year, adjusted by the count of extreme positive returns, indicating the frequency of crash events.

Audit failure is defined as the occurrence of a financial statement restatement following an unqualified audit opinion (Palmrose, 1988). Such restatements indicate that material misstatements were not detected during the audit process and therefore reflect lower audit quality. Following MohammadRezaei et al. (2021), we measure audit partner quality using the audit failure rate (AFR), defined as the ratio of restatements to the total number of audits signed by an individual partner.

The use of AFR is theoretically justified because it captures multiple dimensions of audit quality. Specifically, a lower AFR reflects both superior technical competence – the ability to detect material misstatements – and professional independence – the willingness to require corrections when misstatements are identified. This perspective aligns with the role of auditors as gatekeepers who mitigate information asymmetry by enhancing the credibility and transparency of financial reporting (Wang et al., 2015). Accordingly, AFR directly reflects partner-level effectiveness in preventing the accumulation of undisclosed bad news that can lead to stock price crashes.

Prior research provides strong empirical support for this measure. Wang et al. (2015) show that an audit partner’s historical failure rate predicts future misstatements, with the effect being stronger for engagement (lead) partners than for review partners. Consistent with this evidence, MohammadRezaei et al. (2021) document that, in the Iranian setting, higher AFRs are associated with more frequent restatements and fewer clean audit opinions. Moreover, Francis and Michas (2013) argue that restatements constitute one of the most direct indicators of low audit quality, as they capture realized reporting failures rather than discretionary accounting choices. Taken together, this evidence supports the use of (1 − AFR) as a theoretically grounded and empirically validated proxy for audit partner quality.

The main analysis is performed using the following regression:

This model examines the relationship between audit partner quality (measured by LP_QUALITY and RP_QUALITY) and stock price crash risk. The variables include partner-specific controls such as gender (LP_GENDER, RP_GENDER), experience (LP_EXPERIENCE, RP_EXPERIENCE), workload (LP_WORKLOAD, RP_WORKLOAD) and client importance (LP_CI, RP_CI). In addition, audit firm characteristics (e.g. auditor type, audit delay and tenure) (Rajabalizadeh and Schadewitz, 2025a), corporate governance factors (e.g. audit committee existence, board size) (Wang et al., 2020; Rajabalizadeh, 2025) and firm-specific attributes (e.g. size, leverage and profitability) (Chen et al., 2017; Rezaee and Rajabalizadeh, 2025) are included to control for other potential influences on crash risk. All variables included in the empirical models, along with their detailed definitions and measurement procedures, are reported in the  Appendix.

To test H1, we examine the coefficients on LP_QUALITY and RP_QUALITY. Consistent with the theoretical framework and hypothesis development, we expect these coefficients to be negative, indicating that higher audit partner quality reduces stock price crash risk by constraining bad-news hoarding and enhancing financial reporting transparency.

To test H2, we compare the magnitudes of the coefficients for LP_QUALITY and RP_QUALITY. Because lead partners bear primary responsibility for audit planning, risk assessment and key judgment decisions, their quality is expected to exert a stronger crash-risk–reducing effect than that of review partners.

Table 2 presents the descriptive statistics for 2,898 observations from 2011 to 2024. The average NCSKEW is −0.020 (1.030), aligning with prior studies (Hutton et al., 2009; Callen et al., 2020). DUVOL averages 0.004 and COUNT averages 0.822. The average audit quality scores for lead partners (LP_QUALITY) and review partners (RP_QUALITY) are 0.734 and 0.698, respectively, consistent with MohammadRezaei et al. (2021). Lead partners have higher industry experience and client importance. Other indicators such as audit delay (LNAUDDELAY = 4.299) and audit tenure (AUDTEN = 4.125 years) show moderate values. Governance and financial indicators such as board size (BDSIZE ≈ 5), ROA (0.153), LEVERAGE (0.589) and ZMJSCORE (−2.238) align with patterns observed in previous research (Rajabalizadeh and Schadewitz, 2025a). Panel B shows 28.36% of firms experienced crash events and 20.36% were audited by state auditors.

Table 3 shows the correlation matrix, providing an overview of relationships among the variables. The four crash risk measures (NCSKEW, DUVOL, COUNT, CRASH) are positively correlated, with notable correlations like NCSKEW and DUVOL (0.106) and NCSKEW and COUNT (0.677). Audit partner quality (LP_QUALITY and RP_QUALITY) is negatively correlated with SPCR measures, confirming that higher partner quality is linked to lower crash risk. The correlation for lead partners is stronger, supporting H2, which indicates that lead partners have a greater influence on mitigating crash risk. However, these correlations do not account for firm-level characteristics like size or leverage, so we perform regression analyses to isolate the effects. Multicollinearity is not a concern as variance inflation factors (VIF) are all below 5 (Gujarati, 1995).

Table 4 presents regression results analyzing the effect of lead and review partner characteristics on future stock price crash risk across four measures (NCSKEW, DUVOL, COUNT, CRASH). The analysis reveals significant negative coefficients for LP_QUALITY across all measures (β₁ = −0.164 for NCSKEW, −0.082 for DUVOL, −0.825 for COUNT, −0.289 for CRASH) and for RP_QUALITY (β₂ = −0.122 for NCSKEW, −0.072 for DUVOL, −0.416 for COUNT, −0.234 for CRASH). These findings support H1, showing that higher partner quality reduces the likelihood of stock price crashes. The stronger effect for LP_QUALITY across all measures supports H2, indicating that lead partners have a more significant impact due to their decision-making role in the audit process. These effects should be interpreted in light of Iran’s institutional setting, where external monitoring is relatively limited (e.g. concentrated ownership and weaker media scrutiny) and investors rely more heavily on audited financial statements as a credibility signal (Mirshekary and Saudagaran, 2005; Azizkhani et al., 2022; Rajabalizadeh and Schadewitz, 2025b). Moreover, Iran’s mandatory dual-signature requirement creates distinct accountability incentives for both the lead and review partners, allowing us to isolate partner-level effects beyond audit-firm reputation.

As noted by previous studies (Francis, 2011; Zerni, 2012), both lead and review partner quality significantly reduce crash risk, but lead partners have a stronger effect due to their primary role in audit planning and decision-making (Knechel et al., 2013). The results also reflect Iran’s unique audit environment, where the absence of Big 4 firms and reliance on dual-signature audits highlight the importance of individual partner quality (Mirshekary and Saudagaran, 2005). Gender and experience effects show that female partners and experienced auditors contribute to reducing crash risk (Wang et al., 2020).

Consistent with prior studies, higher partner workload appears to proxy for experience and reputation, which is associated with lower stock price crash risk in resource-constrained audit markets (Habib et al., 2019). A possible explanation is that partners with heavier workloads tend to have higher competence, stronger reputations and access to more audit resources, which allows them to maintain high audit quality despite the added pressure (Wan Hussin et al., 2018). In Iran’s dual-signature audit environment, these partners often handle more prominent clients, which subjects them to greater scrutiny, incentivizing them to uphold audit quality (Rajabalizadeh and Schadewitz, 2025a), thus reducing crash risk.

Control variables also play a crucial role: female partners generally reduce crash risk (Robin and Zhang, 2015); partner experience has a mixed effect, with some significant negative results (Xu et al., 2013); workload effects suggest that higher client loads lead to better outcomes (Habib et al., 2019). Audit firm characteristics like auditor type, audit delay and tenure exhibit varied but stabilizing effects (Callen et al., 2020). Firm attributes, such as DEBTRATIO, SIZE, ROA, LEVERAGE, MB and ZMJSCORE, are significant and align with previous findings (Rajabalizadeh and Schadewitz, 2025a; Faraji et al., 2023). These results highlight the critical role of audit partner quality in enhancing market stability.

Our findings provide important insights into how audit partner quality influences stock price crash risk in Iran’s institutional setting, where audited financial statements play an outsized role in mitigating information asymmetry due to limited external monitoring and concerns over disclosure reliability (Mirshekary and Saudagaran, 2005; Rajabalizadeh and Schadewitz, 2025b). Consistent with the agency-based mechanisms discussed in Section 3, high-quality audit partners constrain managerial bad-news hoarding by strengthening reporting credibility and improving the timeliness of adverse information disclosure. In this context, high-quality partners operate as an “information release valve” by encouraging timely loss recognition and discouraging earnings management practices that delay the release of bad news (Holm and Zaman, 2012; Coffee, 2006).

Our findings extend agency theory by showing that auditors not only monitor management but also influence the timing of information flows to the market (Watts and Zimmerman, 1978; Healy and Palepu, 2001). High-quality partners improve shareholder protection by reducing managers’ ability to withhold unfavorable information. This study also contributes to the audit literature by demonstrating that the effects are more pronounced for lead partners than for review partners. This role differentiation is particularly relevant in Iran because both partners sign the audit report, yet the lead partner bears primary responsibility for planning and key judgments, while the review partner provides independent challenge and oversight within the same engagement (Epps and Messier, 2007; Rajabalizadeh and Schadewitz, 2025a). This is consistent with the lead partner’s greater decision-making authority (Knechel et al., 2013). The finding that review partners also matter, although to a lesser extent, underscores the value of Iran’s dual-signature system, which adds an extra layer of scrutiny to audit engagements (Mirshekary and Saudagaran, 2005).

Interestingly, the negative relationship between partner workload and crash risk suggests that busier partners, who are often more experienced and better resourced, can still deliver higher audit quality. This aligns with the notion that workload may serve as a proxy for reputation and expertise in resource-constrained audit markets (Habib et al., 2019).

Building on the agency framework discussed in Section 3, we examine whether the effect of audit partner quality on stock price crash risk varies with agency costs. According to DeAngelo (1981), the need for high audit quality increases with higher agency costs. We examine shareholder-manager conflicts (measured by insider ownership) and shareholder-debtholder conflicts (measured by an Investment Opportunity Set, IOS, based on market-to-book ratios and risk indicators). Table 5 presents the regression results, categorizing firms by high and low agency costs. Among high-agency-cost firms, audit partner quality (LP_QUALITY and RP_QUALITY) significantly reduces crash risk, especially for lead partners. In low-agency-cost firms, the effects are weaker or insignificant. These findings suggest that higher agency costs demand stronger audit quality to prevent misreporting and stock price crashes, supporting DeAngelo’s theory (1981).

Given the governance role of state ownership in Iran, we examine whether the effect of audit partner quality on stock price crash risk differs across levels of state ownership concentration. In high-concentration SOEs, government control reduces the incentive to conceal bad news (Chen et al., 2011). Panel A of Table 6 shows that in high-concentration SOEs, both lead and review partner quality significantly reduce stock price crash risk, with lead partners having a stronger effect. In low-concentration SOEs (Panel B), the effects are weaker, although there are still some marginal impacts on crash risk. These findings highlight that audit quality plays a more consistent role in enhancing financial reporting reliability in high-concentration SOEs, where stronger state oversight is present.

This study also examines how audit firm size influences audit quality. Larger audit firms, with more resources and experience (Francis and Yu, 2009), are better able to detect managerial bad news and face higher reputational risks, leading to better audit quality. Our untabulated results confirm that even after excluding small audit firms, lead and review partner quality remain significantly linked to lower crash risk. In addition, a subsample analysis by client size shows consistent results and higher audit fees are associated with lower stock price crash risk, indicating stronger audit efforts from larger firms.

To assess the robustness of our findings and address potential endogeneity concerns, we conduct a series of additional analyses, including alternative audit quality measures, fixed effects and instrumental variable estimation.

While AFR is an objective, partner-level indicator of audit quality, it may still be subject to endogeneity concerns due to the non-random assignment of partners to clients. For instance, higher-risk firms may be audited by more experienced or higher-quality partners (Manry et al., 2008; Pittman et al., 2023), which could bias the estimated relationship between partner quality and stock price crash risk. Likewise, unobservable firm-level characteristics – such as corporate governance quality, ownership concentration or audit committee independence – may simultaneously influence both partner assignment and crash risk (Shen et al., 2024). To verify that our results are not driven by the choice of audit quality proxy, we re-estimate the main models using alternative measures of audit quality.

The first is discretionary accruals (|DA|), measured using the modified Jones model (Dechow et al., 1995). Lower levels of absolute discretionary accruals indicate higher audit quality, as auditors effectively constrain managerial earnings manipulation (Becker et al., 1998). The second is audit report modifications (MODOPIN), defined as an indicator variable equal to 1 if the audit report contains a qualified or adverse opinion and 0 otherwise. Modified opinions reflect stricter auditor judgment and a higher likelihood of detecting material misstatements (Habib, 2013). The untabulated empirical results show that higher-quality audit partners – proxied by lower discretionary accruals and a greater likelihood of issuing modified opinions – are significantly associated with lower stock price crash risk. The consistent evidence across different proxies supports the view that audit partners who deliver higher-quality audits, regardless of how audit quality is measured, play a critical role in mitigating the accumulation of undisclosed bad news and reducing the likelihood of extreme negative stock price movements.

We further re-estimate the models using client and audit firm fixed effects, following prior studies (Wang et al., 2020; Kim et al., 2011a). Panel A of Table 7 shows that using client fixed effects confirms a significant negative relationship between audit partner quality and crash risk, with lead partners having a stronger effect. Panel B, using audit firm fixed effects, also shows a negative relationship, although effect sizes slightly decrease, indicating that while firm-level standards matter, individual partner quality is still a key factor in reducing crash risk.

To address potential reverse causality between stock price crash risk and audit partner quality, this study uses 2SLS regression with instrumental variables, following Wang et al. (2020), Callen et al. (2020) and Kim et al. (2014, 2016). In the first stage, industry-average partner quality measures (AVE_LP_QUALITY and AVE_RP_QUALITY) are used as instruments (Kim et al., 2014; Xu et al., 2013; Chen et al., 2017), consistent with prior studies and satisfying standard relevance and exclusion requirements:

In the second stage, the predicted values from the first stage (PRED_LP_QUALITY and PRED_RP_QUALITY) replace the original variables, effectively isolating the exogenous components of partners’ quality from other confounding factors.

The results in Table 8 confirm a persistent negative association between predicted partner quality and stock price crash risk, reinforcing the validity of our findings even under strict controls for endogeneity and reverse causality.

Recent literature has shown that stock price crash risk is influenced by a range of factors, including earnings manipulation (Hutton et al., 2009), accounting conservatism (Kim and Zhang, 2016), tax avoidance (Kim et al., 2011a) and IFRS adoption (DeFond et al., 2015). Given its significance, stock price crash risk is increasingly considered a critical concern in investor decision-making and portfolio management. Building on this body of research, the present study examines whether audit partner quality plays a role in mitigating crash risk – an area identified by Francis (2011) as warranting further investigation.

Using a sample of 2,898 firm-year observations from TSE-listed firms over the period 2011–2024, this study investigates the association between audit partner quality and stock price crash risk. The results indicate that firms audited by higher-quality partners are less likely to experience stock price crashes. This finding remains robust across a series of additional tests, including models that incorporate client and audit firm fixed effects. The association is particularly strong among firms with high agency costs and low-concentration SOEs. Moreover, firms audited by partners affiliated with larger audit firms also demonstrate a lower crash risk. The robustness of the findings is further confirmed using alternative proxies of audit quality – discretionary accruals and audit report modifications – which yield consistent results. To address potential endogeneity, the study also uses a two-stage least squares approach using instrumental variables, further supporting the validity of the results.

The results underscore the importance of strengthening accountability at the individual audit partner level, as opposed to merely focusing on firm size or rotation policies. Reforms such as the PCAOB’s Rule 3211 in the USA (Public Company Accounting Oversight Board, 2015) and the EU’s partner disclosure rules (Quick and Schmidt, 2018) demonstrate that naming engagement partners increases transparency and allows for a more granular level of accountability. In light of the Iranian context, our evidence suggests that monitoring partner-level failure rates, alongside incentivizing ongoing professional development and training, could reduce market risk. Boards and audit committees should also consider evaluating the track record of individual engagement partners, as relying solely on firm reputation may fail to mitigate the risks associated with weak individual partners. This notion is consistent with prior research, such as that by MohammadRezaei et al. (2021), which shows that restatement histories in auditor selection enhance oversight and decision-making processes. Audit firms should actively track partner performance metrics, encourage mentorship programs and strengthen quality control mechanisms, particularly for high-workload or less-experienced partners.

For emerging markets that share institutional features similar to Iran – such as weaker enforcement, concentrated ownership, limited media scrutiny and high reliance on audited financial statements – our evidence suggests that high-quality audit partners can partially substitute for weaker external governance by constraining bad-news hoarding and improving reporting credibility (Mirshekary and Saudagaran, 2005; Azizkhani et al., 2022). In more developed markets with stronger enforcement and greater analyst/media monitoring, the incremental effect of partner-level quality on crash risk may be smaller and should be assessed empirically. Accordingly, our implications are most relevant for markets where auditors serve as primary information intermediaries.

Theoretically, the study extends research on stock price crash risk by introducing audit partner quality as a determinant of financial stability, aligning with agency theory’s view of auditors as independent monitors who reduce information asymmetry (Jensen and Meckling, 1976; Kim et al., 2011a). Evidence that lead partner quality is more significant than review partner quality supports role theory in team auditing, where the lead partner holds primary responsibility for audit decisions (Epps and Messier, 2007; Wang et al., 2015). More broadly, the findings reaffirm that who the auditor is – not just the firm’s reputation – matters in ensuring financial market stability (Gul et al., 2013; Lennox et al., 2014).

From a regulatory standpoint, in Iran’s dual-signature setting, our findings suggest that strengthening partner-level transparency and accountability (e.g. systematic monitoring of partner performance histories and clearer disclosure of signing partners) may be particularly valuable in reducing crash risk. For example, requiring standardized disclosure of signing-partner histories (e.g. restatement-based performance indicators) could help boards and investors evaluate engagement risk more transparently. Dual-signature systems in countries such as China and Taiwan provide a useful comparative backdrop for understanding how partner-level accountability mechanisms may operate, although differences in enforcement and audit market structure imply that policy effectiveness may not transfer one-for-one across jurisdictions (Firth et al., 2012; Lennox et al., 2014). Furthermore, stronger regulatory oversight on audit partner performance can ensure that auditors meet higher professional standards, which in turn benefits investor protection by mitigating potential stock price crashes resulting from poor audit practices.

While this study provides valuable insights into the relationship between audit partner quality and stock price crash risk, it has several limitations that should be considered. First, although (1–AFR) is an outcome-based and partner-level proxy for audit quality, it may not capture all dimensions of partner effectiveness (e.g. industry knowledge, negotiation style or judgment under pressure). Future research could combine AFR with additional partner attributes – such as specialization, co-signing history or behavioral measures – to capture audit quality more comprehensively.

Second, the study may be subject to omitted variable bias, as it does not account for all potential factors influencing audit quality and stock price crash risk. For example, while we control for a range of firm-level characteristics, individual-level factors such as audit partner cognitive traits, psychological biases and team dynamics could further explain variations in audit outcomes. Future research could incorporate more detailed partner-level data, such as behavioral and cognitive assessments, to deepen our understanding of how individual auditors influence audit quality and market stability.

Finally, the generalizability of our findings is limited to Iran’s unique socio-economic and institutional context. Although the dual-signature system and audit partner dynamics in Iran provide an interesting setting, these findings may not be directly applicable to other markets with different regulatory environments or institutional frameworks. Because dual-signature accountability is central to the mechanism studied here, generalization to single-signature regimes should be made cautiously. We suggest that future studies test these findings in other emerging markets with similar audit structures, such as China and Taiwan, where dual-signature audits are also mandated. This would allow for a better understanding of how the findings can be generalized beyond Iran.