Market-Based Incentives for Optimal Audit Quality

40 Pages Posted: 15 Nov 2024 Last revised: 21 Dec 2024

See all articles by Andrew Acito

Andrew Acito

Virginia Tech - Department of Accounting and Information Systems

Amir Amel-Zadeh

University of Oxford - Said Business School

James Anderson

Saginaw Valley State University - College of Business and Management

William L. Anderson

Independent

Daniel Aobdia

Pennsylvania State University - Smeal College of Business

Francois Brochet

Boston University - Department of Accounting

Huaizhi Chen

University of Notre Dame - Department of Finance

Jonathan Fluharty-Jaidee

Public Company Accounting Oversight Board

Martin C. Schmalz

CEPR; University of Oxford - Finance; CESifo; European Corporate Governance Institute (ECGI)

Manyun Tang

University of Oxford - Said Business School

Scott J. Wang

Pennsylvania State University - Penn State

Joshua T. White

Vanderbilt University - Finance

Thomas Bourveau

Columbia University

William R. Zame

University of California, Los Angeles (UCLA) - Department of Economics

Date Written: October 23, 2024

Abstract

We examine how equity markets respond to the public release of audit-firm inspection reports by the U.S. regulator. Investors react differently based on the identifiability of the public issuers whose audits are covered in the inspection report. Auditors with identifiable issuer clients show positive abnormal returns for non-deficient reports and negative reactions for deficient ones. In contrast, issuers less easily linked to specific auditor inspections experience muted responses. More timely publication of inspection reports intensifies market reactions, while delays reduce their informativeness. The findings highlight how regulatory transparency can enable investors to better in- corporate audit quality information into equity prices. We discuss implications for market-based incentives for issuers and auditors.

Keywords: Audit Quality, Audit Regulation, Event Study, Abnormal Returns, Inspection Report JEL Classification: M41, M42, M48, G18, G14

JEL Classification: M41, M42, M48, G18, G14

Suggested Citation

Acito, Andrew and Amel-Zadeh, Amir and Anderson, James and Anderson, William L. and Aobdia, Daniel and Brochet, Francois and Chen, Huaizhi and Fluharty-Jaidee, Jonathan and Schmalz, Martin C. and Schmalz, Martin C. and Tang, Manyun and Wang, Scott Jinzhiyang and White, Joshua T. and Bourveau, Thomas and Zame, William R., Market-Based Incentives for Optimal Audit Quality (October 23, 2024). Available at SSRN: https://ssrn.com/abstract=4997362 or http://dx.doi.org/10.2139/ssrn.4997362

Andrew Acito

Virginia Tech - Department of Accounting and Information Systems ( email )

Pamplin College of Business
Blacksburg, VA 24061
United States

Amir Amel-Zadeh

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

James Anderson

Saginaw Valley State University - College of Business and Management ( email )

7400 Bay Rd
University Center, MI 48710
United States

Daniel Aobdia

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

Francois Brochet

Boston University - Department of Accounting ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Huaizhi Chen

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Jonathan Fluharty-Jaidee

Public Company Accounting Oversight Board ( email )

Martin C. Schmalz (Contact Author)

University of Oxford - Finance ( email )

United States

CEPR ( email )

London
United Kingdom

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Manyun Tang

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Scott Jinzhiyang Wang

Pennsylvania State University - Penn State ( email )

305A Business Building
State College, PA 16802
United States

Joshua T. White

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Thomas Bourveau

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

William R. Zame

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Los Angeles, CA 90095-1477
United States
310-206-9463 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
251
Abstract Views
873
Rank
247,825
PlumX Metrics