Does High Quality Auditing Mitigate or Encourage Private Information Collection?

45 Pages Posted: 9 May 2014 Last revised: 15 May 2017

See all articles by Yangyang Chen

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business

M. Shibley Sadique

Rajshahi University

Bin Srinidhi

University of Texas at Arlington - Department of Accounting; City University of Hong Kong (CityUHK) - Department of Accountancy

Madhu Veeraraghavan

T.A. PAI Management Institute, Finance Area

Date Written: May 15, 2017

Abstract

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 (a) more private information to benefit from lower information collection cost or (b) 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 to 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.

Keywords: Audit Quality; Private Information Collection; Idiosyncratic Return Volatility; Information Asymmetry

Suggested Citation

Chen, Yangyang and Sadique, M. Shibley and Srinidhi, Bin and Veeraraghavan, Madhu, Does High Quality Auditing Mitigate or Encourage Private Information Collection? (May 15, 2017). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2434234

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business ( email )

9/F, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon M923
China

M. Shibley Sadique

Rajshahi University ( email )

Rajshahi, 6205
Bangladesh

Bin Srinidhi (Contact Author)

University of Texas at Arlington - Department of Accounting ( email )

Arlington, TX 76013
United States

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Madhu Veeraraghavan

T.A. PAI Management Institute, Finance Area ( email )

Bangalore
Manipal, Karnataka 576104
India
+91-820-2701030 (Phone)

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