Abstract
This study investigates the role of personality similarity in the formation of auditor-in-charge (AIC)-client management dyads and the development of a collaborative relationship in auditing engagements. We apply the principle of homophily from sociology, that is, the attraction of individuals with similar traits to one another, to the formation of supplier-customer dyads in auditing engagements. Our analyses suggest that AIC-management personality similarity increases the likelihood of dyad formation and facilitates client retention. Using an instrumental variable approach, we further find evidence that AIC-chief executive officer (CEO) personality similarity enhances audit quality, and that this effect is stronger for clients with higher misreporting risk and at the beginning of the AIC-client tenure relationship. Among publicly listed clients, where chief financial officer (CFO) data are available, we find that AIC-CFO personality similarity plays a more important role in AIC-client matching and audit outcomes than AIC-CEO personality similarity. Collectively, our results suggest that a personality homophily-based relationship facilitates collaboration in auditing engagements, ultimately enhancing audit quality. Overall, our evidence highlights the benefit of interpersonal relationships in the production of audit services.