Audit quality, management ownership, and the informativeness of accounting earnings

This study has two primary objectives. First, it examines whether audit quality moderates the association between informativeness of accounting earnings and management ownership. Second, it also examines whether audit quality moderates the negative association between management ownership and discretionary accruals. Using Australian data, it is shown that the positive relationship between returns-earnings association and management ownership is significantly weaker for firms with Big 6 auditors.Similarly, the negative association between management ownership and discretionary accruals is weaker for firms with Big 6 auditors. These results are consistent with the theory that higher quality audits can mitigate insiders' incentives to exploit accounting-based contractual constraints and manage earnings as a result of the separation of ownership and control.