The role of audit quality in firm valuation

2016 ◽  
Vol 58 (5) ◽  
pp. 575-598 ◽  
Author(s):  
Mishari M. Alfraih
Keyword(s):  
Audit Quality ◽  
Value Relevance ◽  
Accounting Information ◽  
Institutional Setting ◽  
Content Type ◽  
Book Value ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Team

Purpose The purpose of this paper is to examine the effect of audit quality on the value relevance of earnings and book value. Because joint audit is mandated for all Kuwait Stock Exchange-listed firms, it is hypothesized that the higher the quality of the audit team (as measured by the number of Big 4 audit firms in the joint audit team), the higher the value relevance of earnings and book values for equity valuation. Design/methodology/approach Consistent with prior research, the value relevance of earnings and book value is measured by the adjusted R2 derived from the Ohlson’s 1995 regression model. The number of Big 4 audit firms represented on the firm’s audit team is used as a proxy for audit quality. Three tiers of audit quality exist, namely, two non-Big 4 audit firms, one Big 4 and one non-Big 4 audit firms or two Big 4 audit firms. To address this paper’s objective, the association between audit quality and the value relevance of earnings and book value were examined using four approaches. The final sample consists of 1,836 firm-year observations and covers fiscal years from a 12-year period (2002-2013). Findings Taken together, the four approaches used collectively provide empirical evidence that audit quality positively and significantly affects the value relevance of accounting measures to market participants. Importantly, the results reveal significant variations in the value relevance of earnings and book value jointly across the three possible auditor combinations. Research limitations/implications Although using auditor size as a proxy for audit quality is well established in the auditing literature, a limitation of that proxy is that it measures audit quality dichotomously, which implicitly assumes a homogeneous level of audit quality within each group. Practical implications The findings show the importance of high-quality and rigorous external audits in improving the value relevance of accounting information. Originality/value This study contributes to the extent literature on audit quality by exploring the role of audit quality in a unique institutional setting that imposes mandatory joint audits. Although prior studies have investigated the effect of joint audit pair choice on earnings management and audit fee premium, this study is the first to investigate the effect of joint audit pair choice on the value relevance of accounting information.

Corporate governance and value relevance of accounting information

2020 ◽  
Vol 36 (2) ◽  
pp. 249-262
Author(s):  
Hesham I. Almujamed ◽  
Mishari M. Alfraih
Keyword(s):  
Financial Reporting ◽  
Value Relevance ◽  
Accounting Information ◽  
Empirical Support ◽  
Board Size ◽  
Content Type ◽  
Book Value ◽  
Board Characteristics ◽  
Market Participants ◽  
The Impact

Purpose This paper aims to explore how the characteristics of the board of directors (BoD) shape earnings and book value information available to market participants. Design/methodology/approach The authors investigated the impact of board size, presence of non-executives and role duality as proxies of effective corporate governance on the value relevance of financial reporting for 178 firms on the Kuwait stock exchange in 2013. Regression analysis based on Ohlson’s (1995) valuation model was used to test hypotheses. Findings The authors found that board size was significantly associated with company value and that Kuwaiti firms with large boards increased the value-relevance of earnings and book value. The influence of role duality was positive although not significant. The presence of non-executives on the board had a negative correlation with market value (not significant). Research limitations/implications These findings deliver empirical support for the prediction that the characteristics of the BoD improve the value relevance of financial reporting. Limitations such as small sample size and one-year duration of the study did not negate the basic findings, however. Future studies will use larger samples, longer duration and additional board characteristics. Practical implications This study provides empirical support for the hypothesis that board size influences market valuation. This study may benefit managers, investors and other decision-makers. Originality/value This study delivers empirical evidence on the impact of board characteristics on the value relevance of accounting information. It will be useful for regulators and market participants monitoring the influence of board characteristics on the value relevance of accounting information.

Does institutional ownership affect the value relevance of accounting information?

2020 ◽  
Vol 28 (2) ◽  
pp. 323-342
Author(s):  
Mohamed Omran ◽  
Yasean A. Tahat
Keyword(s):  
Value Relevance ◽  
Accounting Information ◽  
Market Value ◽  
Institutional Ownership ◽  
Financial Leverage ◽  
Content Type ◽  
Book Value ◽  
Share Prices ◽  
Listed Firms ◽  
Positive Effects

Purpose Drawing upon agency theory, this study aims to assess the value relevance (VR) of accounting information released by non-financial firms listed on the Kuwait stock exchange for the period of 2015-2018. Also, the influence of institutional ownership level and other explanatory variables, namely, book value per share, earnings per share, growth in assets and changes in financial leverage on share prices is examined. Design/methodology/approach To test the hypotheses, the Ohlson (1995) model is extended. This study uses panel data analysis and applies appropriate statistical techniques to measure empirical relationships. Findings The results show that the VR of accounting information released by the Kuwaiti non-financial listed firms varies over the period of 2015-2018. Book value and earnings have significant and positive effects on share prices. In recent years, the VR of book value information has been growing, while that of earnings information has been declining. Institutional ownership level has a significant and positive influence on the VR of accounting information released by the Kuwaiti non-financial listed firms. The findings confirm a positive power, signalling growth in assets regarding the share prices. However, no significant relationship between changes in financial leverage and share prices is found. Practical implications The findings of the study provide evidence of the linkage between VR and institutional ownership level, which promotes the understanding of the influence of institutional investors on a firm’s market value. Empirical evidence from Kuwait will have international implications and can serve as a guide for accounting researchers studying other emerging markets. Capital market regulators can provide guidelines in the form of information characteristics and elements of financial statements that need improvement. Finally, the findings assist non-financial listed firms to enhance the quality of accounting information by identifying the strengths and weaknesses in their financial reports. Originality/value This study extends the previous literature by investigating a relatively new set of data in more depth than that has been examined by prior research, which focusses on the relationship between accounting information and the firm’s market value.

Governance role of media coverage: from the view of accounting information value relevance and market value about share pledge firms in China

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Li Gao ◽  
Jinnan Song ◽  
Jianxiao Guo ◽  
Jiajuan Liang
Keyword(s):  
Media Coverage ◽  
Information Disclosure ◽  
Value Relevance ◽  
Accounting Information ◽  
Market Value ◽  
Moderating Effect ◽  
Information Value ◽  
Accounting Earnings ◽  
Content Type

Purpose Share pledge is a popular way to raise funds in China, but it aggravates information asymmetry. As an indispensable information intermediary in the financial market, media coverage affects asset price and pricing efficiency and impacts information asymmetry. This study aims to explore the governance role of media coverage as an information intermediary in the share pledge context in China. Design/methodology/approach Moderating effect and mediating effect analyses are the primary methods used to test the governance role of media coverage. The ordinary least squares model was used to test the relationship between share pledge and market performance and then proved the moderating effect of media coverage toward the corporate market value of pledge firms. Accounting earnings value relevance models were explored to test the path of media coverage on firm market value by mediating effect analysis. At last, subgroup tests were used to verify the heterogeneity of the moderating effect of media coverage. Findings In the context of share pledge in China, the higher the share pledge ratio, the higher is the market value of listed firms, which verifies the motivation of controlling shareholders to avoid the transfer of control right and the motivation to tunneling. Media coverage has a significant negative moderating effect on the relationship between share pledge rate and corporate value and has a significant impact on the accounting earnings value relevance of share pledge firms. From the perspective of long-term earnings, media coverage reduces the market performance of share pledge firms by reducing the value correlation of accounting earnings information. From the short-term price point of view, media coverage reduces the market performance of share pledge firms by improving the value correlation of accounting earnings information. Furthermore, media coverage has a more significant moderating effect in state-owned share pledge firms and low information transparency and low information disclosure quality firms. Research limitations/implications This paper does not distinguish the mode difference of spreading news and the impact of non-pledge media coverage. Also, this paper does not consider factors other than accounting information value relevance when exploring how media coverage affects the corporate market value. Share pledge firms should use media for publicity and play a role in media governance and should actively improve their information disclosure quality, strengthen communication with investors and reduce information asymmetry fundamentally. Practical implications This paper diversify the governance choices for share pledge firms and has important implications for firms, investors, information intermediaries and regulators. Media reports play an increasingly important role today, and any reports and predictions of major events may profoundly affect investors’ decisions. Although media reports can make up for the weakness of accounting information disclosure of equity pledge companies in some sense, it is still not a long-term strategy. Equity pledge companies should not only make use of media for publicity and play a role of media governance but also actively improve their information disclosure quality. Originality/value This paper focuses on share pledge firms to carry out in-depth research. Based on exploring the influence mechanism of share pledges, the authors find the importance of media governance. This paper expands the literature about the economic consequences of share pledges and provides empirical data for media governance of share pledge firms. This paper innovatively proves the governance role of media coverage from the view of accounting information value relevance. The main innovation point is the long and short-term perspective analysis of the influence of media coverage on the correlation of accounting earnings value. The heterogeneity effect analysis of media coverage also reflects the depth and strong practical guiding significance of this study.

Auditor's report, auditor's size and value relevance of accounting information

2020 ◽  
Vol 21 (4) ◽  
pp. 721-739
Author(s):  
Ahmad Abdollahi ◽  
Yasser Rezaei Pitenoei ◽  
Mehdi Safari Gerayli
Keyword(s):  
Financial Reporting ◽  
Firm Size ◽  
Value Relevance ◽  
Accounting Information ◽  
Positive Association ◽  
Alternative Measure ◽  
Policy Makers ◽  
Content Type ◽  
Audit Firm ◽  
Audit Firms

PurposeThe present study sets out to examine the effect of auditor's report and audit firm size on the value relevance of accounting information of the companies listed on the Tehran Stock Exchange during the years 2008–2017.Design/methodology/approachThe study includes a sample of 1,530 firm-year observations drawn from the listed companies, and the research hypotheses were analyzed using multivariate regression model based on panel data.FindingsThe findings reveal that auditor's report and audit firm size are positively and significantly correlated with two indicators of the value relevance of accounting information including value relevance of earnings and book value per share. Also our results exhibit robustness to the alternative measure of auditor's attributes.Research limitations/implicationsAs far as we know, this is the first study to analyze the association between auditor's attributes and value relevance of accounting information in emerging capital markets, thereby generating certain implications for investors, managers, capital market policy makers and audit profession regulators in general and those in emerging markets in particular.Practical implicationsOur findings have implications for policy makers, regulators, managers and investors. Our evidence on the positive association between auditor's size and value relevance of accounting information should help policy makers and regulators which they improve value relevance of accounting information and financial reporting by integrating small audit firms and setting up larger audit firms.Originality/valueA rise in the value relevance of accounting information deserves further attention while drawing investment, selling the stocks of existing firms and increasing investor's decision-making ability. The way how auditor's attributes can promote the value relevance of accounting information is still open to new research.

scholarly journals How to regain public trust in audit firms? The case of the Financial Reporting Council

2018 ◽  
Vol 31 (3) ◽  
pp. 343-359 ◽  
Author(s):  
Mohamed Khaled Eldaly ◽  
Magdy Abdel-Kader
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Public Trust ◽  
Audit Committees ◽  
Structured Interviews ◽  
Content Type ◽  
Audit Market ◽  
Big 4 ◽  
Audit Firms ◽  
The Uk

Purpose This study aims to provide a better understanding of the role of the Financial Reporting Council (FRC), as the unified regulator of the audit profession in the UK, in restoring public trust in audit profession in the UK. It further analyses the views of partners in the Big 4 audit firms on this role. Design/methodology/approach The research data were gathered by conducting 17 semi-structured interviews with the top management of FRC’s members and executive partners of the Big 4 firms in the UK. The interviews were complemented by analysing data available on the web pages of the Big 4 firms and published reports related to the FRC’s projects. Findings This study identified three main strategies followed by the FRC to promote the trust and enhance the choice of auditors in the UK audit market. These strategies are improving the audit quality, increasing the transparency of the big audit firms and reducing the barriers to compete in the big audit market. Practical implications An analysis of the FRC’s efforts may help auditors to identify what they are expected to do to improve the reliability of information provided in the capital market. Audit committees can get a better understanding of the criteria that they need to improve the process of auditors’ choice. Auditors will also better understand how and why current audit regulations have been issued. This may improve their satisfaction with regulations and standards, and their efficient implementation. Furthermore, it is believed that audit regulators need to get feedback additional to the formal feedback they receive to improve their performance and current regulations. Originality/value This paper contributes to the literature by discussing the auditors’ criticism to the Audit Inspection Unit’s inspectors and the way the inspectors defend themselves. The findings suggest that partners of the Big 4 believe that the FRC’s projects effectively participate in improving the audit quality, as well as providing wider information about the audit firms to the public. However, different actions need to be taken to enhance the choice of auditors and increase the number of big audit firms that compete in the market.

Audit quality differences amongst audit firms in a developing economy

2016 ◽  
Vol 6 (3) ◽  
pp. 269-290 ◽  
Author(s):  
Twaha K. Kaawaase ◽  
Mussa Juma Assad ◽  
Ernest G Kitindi ◽  
Stephen Korutaro Nkundabanyanga
Keyword(s):  
Financial Services ◽  
Audit Quality ◽  
Accounting Standards ◽  
Board Members ◽  
Regulatory Requirements ◽  
Content Type ◽  
Services Sector ◽  
Financial Services Sector ◽  
Big 4 ◽  
Audit Firms

Purpose – The purpose of this paper is to report findings of audit quality differences amongst audit firms in a developing country. Specifically, the authors examine the assumption of marked audit quality differences amongst large audit firms (Big 4s) and the small and medium practices (SMPs). Design/methodology/approach – First, the authors develop scales for assessing perceived audit quality in the financial services sector based on qualitative data obtained from 106 audit practitioners, 31 credit analysts and 13 board members. The authors use NVivo© to analyse the 13 transcribed interviews and follow “cross-case analysis” to visualize dimensions and scales of audit quality. Then the authors use measurement scales developed and obtain quantitative data from 183 board members and top executives in the financial services sector and test for perceived audit quality differences amongst audit firms using a Mann-Whitney U test. Findings – The findings suggest that audit quality is a multi-dimensional construct comprising of levels of discretionary accruals; compliance of audited accounts to accounting standards, law and regulations; and audit fees. Based on these measures, the authors find that Big 4 audit firms ensure more compliance with accounting standards, law and other regulatory requirements than SMPs. However, taking all the three audit quality dimensions together reveals no significant differences in audit quality levels between Big 4 and SMPs. Research limitations/implications – In terms of auditor selection and retention, it is important that audit firms are assessed based on their ability to constrain discretionary accruals, to produce audited accounts that comply with requirements of accounting standards, the law and regulations; and to examine the fees they charge in relation to quality of service, than on their size. Also, as the results of this study suggest that Big 4 audit firms might be needed for compliance with accounting standards, law and other regulatory requirements, their audit ties in with the most basic level of auditing requiring probity and legality which, in practice, requires a low level of judgement to be exercised by those performing the audit. It might be useful for Big 4 and other audit firms to embark also on higher level of auditing requiring higher level of judgement. Future research may wish to examine auditing firms’ proclivity to higher level judgment audit. Originality/value – Previous research reveals no consistent way of measuring audit quality and has been inconclusive on the subject of audit quality differential amongst audit firms. The authors create audit quality scales which can be used in assessing perceived audit quality in a developing country context and provide initial evidence of no significant differences between large audit firms and the SMPs regarding audit quality in Uganda.

To be or not to be – auditors’ ability to signal going concern problems

2015 ◽  
Vol 11 (2) ◽  
pp. 175-192 ◽  
Author(s):  
Torbjörn Tagesson ◽  
Peter Öhman
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Annual Reports ◽  
Content Type ◽  
Going Concern ◽  
Big 4 ◽  
Audit Firms ◽  
Research Opportunity ◽  
Audit Reports ◽  
The Impact

Purpose – This paper aims to chart Swedish auditors’ likelihood of issuing going concern warnings (GCWs), and to investigate the relationship between formal auditor competence, audit fees and audit firm, respectively, and the likelihood of issuing GCWs. Design/methodology/approach – The empirical data are based on annual reports and audit reports for 2,547 limited companies that went bankrupt in 2010 in the wake of the financial crisis and had filed a financial statement in the year before the bankruptcy. Findings – The findings indicate that Swedish auditors seldom issue GCWs. Moreover, there is a positive relationship between audit fee level and the likelihood of issuing GCWs, and Big 4 auditors being more likely to issue such warnings than other auditors. However, the analyses identify differences between audit firms (within the group of Big 4 firms and within the group of other audit firms) in terms of their predictions of client bankruptcies. This suggests a need for further investigation of firm-specific differences. Contrary to what was predicted, authorized auditors are not more likely to issue GCWs than approved auditors. Research limitations/implications – This paper did not investigate the impact of audit experience and tenure or the possibility that auditors may signal survival problems by resigning. Practical implications – Levying appropriate audit fees creates opportunities for thorough audits, but auditors’ formal competence based on training and qualification is not a factor that enforces audit quality. Based on the findings, the authors also suggest some clarifications of existing standards to reduce ambiguity regarding the reporting of survival problems. Originality/value – The Swedish setting is a context in which most companies are small, creditor interest in accounting and auditing is strong and auditors must issue a modified audit opinion if half of the shareholders’ equity is spent. This setting offers a unique research opportunity because the formal competence differs between Sweden’s two categories of certified auditors, and it allows exploration beyond the dichotomy of Big 4 versus other audit firms.

Impacts of FRS139 adoption on value relevance of financial reporting in Malaysia

2016 ◽  
Vol 42 (7) ◽  
pp. 706-721 ◽  
Author(s):  
Chin-Yee Gan ◽  
Lee-Lee Chong ◽  
Zauwiyah Ahmad
Keyword(s):  
Financial Reporting ◽  
Value Relevance ◽  
Balance Sheet ◽  
Developed Countries ◽  
Net Income ◽  
Content Type ◽  
Book Value ◽  
Financial Reporting Standards ◽  
Institutional Settings

Purpose – The purpose of this paper is to investigate the impacts of Financial Reporting Standards (FRS)139 adoption on value relevance of financial reporting for non-financial public listed companies in Malaysia. Design/methodology/approach – Multiple regressions were applied in this study to explore the value relevance of financial reporting upon FRS139 adoption. Findings – The finding indicates that book value of equity and net income after tax are significant in jointly explaining the variations associated with market value for both the pre- and post-FRS139 period. However, the role of the book value of equity and the balance sheet in stock market valuation is becoming increasingly important compared with the role of net income after tax and income statement upon mandatory adoption of FRS139. Originality/value – This study provides relevant insights into the potential consequences of FRS139 adoption in Malaysia. This is a significant event in the history of financial reporting in Malaysia. Given the importance and complexity of applying IAS39 in more developed countries, the results of this study add to current literature by providing a comprehensive empirical analysis on the effects of FRS139 adoption on financial reporting in Malaysia, a developing country where the economy is smaller, the financial market less efficient, and institutional settings different from developed countries.

The role of the Big 4 and second-tier international networks in redeveloping China’s audit market

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Camillo Lento ◽  
Wing Him Yeung
Keyword(s):  
Audit Quality ◽  
Ordinary Least Squares ◽  
Second Phase ◽  
Tier 2 ◽  
Least Squares Regression ◽  
Content Type ◽  
Audit Market ◽  
Big 4 ◽  
Audit Firms ◽  
Second Tier

Purpose This study aims to explore the audit quality supplied by the Big 4, large indigenous Chinese (LIC) and five largest second-tier international network (Tier 2) audit firms in China during the second phase of their audit market development. Design/methodology/approach Ordinary least squares regression is used on an archival sample of firm-year observations. Endogeneity and self-selection bias are addressed by creating a propensity score matched sample and using two-stage regression with the inverse Mills’ ratio. Findings Strong evidence is found for higher levels of actual audit quality for the Big 4 relative to both LIC and Tier 2 audit firms. Weak evidence is found regarding the audit quality superiority of Tier 2 relative to LIC audit firms. Furthermore, the actual audit quality differential between the Big 4 relative to the LIC and Tier 2 firms widens after adopting International Financial Reporting Standards, which is contrary to the intention of Chinese regulators. Originality/value To the best of the authors’ knowledge, this is the first known empirical study to trisect Big N and non-Big N audit firm proxies into the Big 4, LIC and Tier 2. Currently, only qualitative studies have fully appreciated the unique regulatory roles of these three firm structures in developing China’s audit market, which reflect tensions between reliance on foreign expertise and self-determination. In addition, this study adds to the ongoing global dialogue on Tier 2 as an alternative to the Big 4 and the benefits of international accounting network membership.

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