Audit quality information risk and information asymmetry between traders
- Publication Type:
- Thesis
- Issue Date:
- 2008
Closed Access
Filename | Description | Size | |||
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01Front.pdf | contents and abstract | 477.94 kB | |||
02Whole.pdf | thesis | 32.27 MB |
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NO FULL TEXT AVAILABLE. Access is restricted indefinitely. ----- This study investigates the effects of audit quality information risk on the information
asymmetry between informed and uninformed traders. Audit quality information risk
is defined as the risk of errors, misstatements; omissions and frauds in accounts
arising from the quality of the audit delivered on these accounts. This research
suggests that that audit quality information risk reduces the reliability of a firm's
accounting information, which reduces the quality of disclosed accounting
information. This in turn increases the information asymmetry between traders by
increasing the amount of private information relative to public information,
reinforcing informed traders' informational advantage (Levitt, 1998), making traders'
beliefs more heterogeneous (Diamond, 1985) and stimulating traders to search for
private information (Diamond, 1985; Verrecchia, 2001 ). This study utilises
traditional audit quality proxies most supported by the extant literature, based on audit
firm size, auditor industry specialisation, audit effort and audit opinion to capture the
audit quality information risk and to investigate the influence of this risk on
information asymmetry between traders.
Using both Australian and US data, this research measures information asymmetry
between traders in the stock and options markets based on absolute price difference,
absolute volatility difference and absolute difference of long/short ratio of trades
between the two markets. In a sample of230 firm-year observations from years 1999
to 2004 in the Australian market, the study finds that industry specialist auditors and
unexpected audit fee (the ratio of actual audit fees to expected audit fees) are
significantly negatively correlated with information asymmetry between traders.
Results suggest that firms choosing industry specialist auditors or firms having higher
unexpected audit fees enjoy lower information asymmetry between traders. This
supports the hypothesis that lower audit quality information risk (AQIR} is associated
with lower information asymmetry between traders. The test results for a sample of
4715 firm-year observations from years 2002 to 2005 in the US market show that Big
n and industry specialist auditors are significantly negatively correlated with
information asymmetry between traders. This suggests that firms choosing Big n or
industry specialist auditors have lower information asymmetry between traders, which
supports the hypothesis that lower AQIR is related to decreased information
asymmetry between traders. However, unexpected audit fee (UAF) is significantly
positively correlated with all information asymmetry measures. Moreover, in both the
Australian and US markets, effects of the key AQIR proxies on information
asymmetry are unchanged after controlling for the effect of earnings quality (EQ),
suggesting AQIR and EQ have separate effects on information asymmetry between
traders. Finally, motivated by Khurana and Raman (2004) who conduct a cross-country
study to investigate the two drivers of audit quality (an information driver that
is tied to the financial reporting credibility notion and an insurance driver that is tied
to the litigation exposure notion), the investigation of both Australian and US settings
shows that two common AQIR proxies (industry specialist and UAF) are significant
in both countries. This suggests that audit quality is driven by information demand as
opposed to insurance demand.
Overall, the results offer strong support for the proposition that audit quality
information risk primarily related to the choice of industry specialist auditors and the
level of unexpected audit fees is information driven and lower AQIR lowers
information asymmetry between traders.
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