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Does high-quality auditing mitigate or encourage private information collection?

Version 2 2024-06-03, 13:34
Version 1 2018-03-06, 14:18
journal contribution
posted on 2024-06-03, 13:34 authored by Y Chen, S Sadique, B Srinidhi, M Veeraraghavan
The finance literature offers two competing possibilities on how investors respond to the quality of public financial statements in their pricing decisions. They could collect either (i) more private information to benefit from lower information collection cost, or (ii) less private information because of lower incremental benefits. In this paper, we use the audit setting to examine which possibility prevails. Using the idiosyncratic return volatility as a proxy for firm-specific information, we show in a sample of 51,559 firm-year observations for 8,261 U.S. firms spanning the period of 2000–2010 that firms audited by higher-quality auditors exhibit lower average idiosyncratic return volatility but a higher concentration of it at the time of earnings announcements. Our findings are consistent with the argument that investors reduce private information collection in response to higher audit quality. Our findings are robust to alternative measures of audit quality and idiosyncratic return volatility.

History

Journal

Contemporary accounting research

Volume

34

Season

Fall

Pagination

1622-1648

Location

Chichester, Eng.

ISSN

0823-9150

eISSN

1911-3846

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal, C Journal article

Copyright notice

2017, CAAA

Issue

3

Publisher

John Wiley & Sons