Industry-Expert Auditors and Investor Valuations in Regulated Industries: Evidence from Banking
Academy of Accounting and Financial Studies Journal, Vol. 3, No. 1, 1999
10 Pages Posted: 22 Mar 2012 Last revised: 26 Mar 2012
Date Written: March 19, 2012
We propose that regulation increases the demand for industry-expert auditors. We hypothesize that this increase in demand will be reflected in the degree of reliance investors place on financial information certified by industry-expert auditors. We evaluate the return-earnings relation for regulated banks that choose industry-expert and non-industry-expert auditors. By enhancing the credibility of the financial statements, industry-expert auditors potentially strengthen the link between earnings and returns even in a regulated environment. The results suggest that the choice of an expert-auditor favorably affects investor valuations of the banks used in the sample. Earnings explains more of the variation of returns when the earnings numbers are certified by expert versus non-expert auditors after controlling for the effects of regulatory attention.
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