Audit Quality and Information Asymmetry Between Traders

Abstract

In this study we investigate the association between audit quality and information asymmetry between informed and uninformed traders. We employ three proxies for information asymmetry - absolute price differences, absolute volatility differences, and absolute differences in the long/short ratio of trades - between U.S. stock and options markets, and represent audit quality through the appointment of Big n and industry specialist auditors. For a sample of 4,062 firm-years between 2002 to 2005 our results indicate that the appointment of Big n and industry specialist auditors is associated with lower information asymmetry measures. Our results are consistent with audit quality playing a role in the quality of financial reporting information and flowing through to the allocation of information amongst traders.

Keywords: Audit quality, information asymmetry, earnings quality

JEL Classification: M42