Open AccessJournal Article
Perceived Auditor Quality and the Earnings Response Coefficient
T.J. Wong,Siew Hong Teoh +1 more
1.4K
TL;DR: In this article, the authors examined whether the earnings response coefficient (ERC) differs between Big Eight (B8) and non-Big Eight (NB8) audited firms and provided a test of the joint hypotheses that auditor size is a proxy for auditor credibility and modified Holthausen-Verrecchia (1988) model.
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Abstract: SYNOPSIS AND INTRODUCTION: An auditor's reputation lends credibility to the earnings report that he audits. An unresolved issue is whether auditor size is correlated with auditor quality, where a high-quality auditor is defined as one who brings about more credible earnings reports. According to basic intuition and a modified Holthausen-Verrecchia (1988) model, investors' response to an earnings surprise will depend on the perceived credibility of the earnings report. In this study, we examine whether the earnings response coefficient (ERC) differs between Big Eight (B8) and non-Big Eight (NB8) audited firms. This provides a test of the joint hypotheses that auditor size is a proxy for auditor credibility and of the modified H-V model. Consistent with the joint hypotheses, we find that the ERCs of Big Eight clients are statistically significantly higher than for non-Big Eight clients. The result obtains in both a matched sample of firms paired according to industry membership, and a switch sample of firms grouped according to shifts from and to B8 and NB8 auditors. Furthermore, the result is robust with respect to the inclusion of other explanatory factors for ERC that have been suggested by previous studies: growth and persistence, risk, firm size, and predisclosure information environment.
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Citations
Investor Information Demand: Evidence from Google Searches Around Earnings Announcements: investor information demand
TL;DR: In this paper, the authors investigate factors that influence investor information demand around earnings announcements and to provide insights into how variation in information demand impacts the capital market response to earnings, finding that abnormal Google search increases about two weeks prior to the earnings announcement, spikes markedly at the announcement, and continues at high levels for a period after the announcement.
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Audit quality, corporate governance, and earnings management: A meta-analysis.
Jerry W. Lin,Mark I. Hwang +1 more
TL;DR: In this paper, a meta-analysis identifies 12 significant relationships by integrating results from 48 prior studies and finds that audit committee independence, as measured by fee ratio and total fee, is also a deterrent to earnings management.
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The Value of Financial Statement Verification in Debt Financing: Evidence from Private U.S. Firms
TL;DR: In this article, the authors examine how verification of financial statements influences debt pricing and find that audited firms have a significantly lower cost of debt and that lenders place more weight on audited financial information in setting the interest rate.
Effects of Audit Quality on Earnings Management and Cost of Equity Capital: Evidence from China†
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References
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Predisclosure Information, Firm Capitalization, and Security Price Behavior Around Earnings Announcements
TL;DR: In this article, the authors focus on the relationship between earnings reports and security price behavior and find that a significant portion of the information revealed through earnings reports is reflected in security prices prior to the report month (e.g., Ball and Brown [1968] and Brown and Kennelly [1972]).
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