Market-Based Incentives for Optimal Audit Quality
40 Pages Posted: 15 Nov 2024 Last revised: 21 Dec 2024
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: 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
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