The Relevance of Quantifiable Audit Qualifications in the Valuation of Ipos

52 Pages Posted: 14 Jun 2006

See all articles by Dimitrios C. Ghicas (Gikas)

Dimitrios C. Ghicas (Gikas)

Athens University of Economics and Business - Department of Accounting and Finance

Aphroditi J. Papadaki

Athens University of Economics and Business - Department of Accounting and Finance

Theodore Sougiannis

University of Illinois at Urbana-Champaign - Department of Accountancy

Georgia Siougle

Athens University of Economics and Business - Department of Accounting and Finance

Date Written: April 2006

Abstract

How useful are audit qualifications to financial statement users? Prior studies provide mixed evidence on this fundamental issue. In this study we analyze a sample of 206 firms that went public at the Athens Stock Exchange over the period 1987-2002. This is a unique sample because for 150 firms auditors report quantitative estimates of the amount by which assets are overstated and/or liabilities are understated in reported financial statements. We find evidence that financial analysts and underwriters do not incorporate the negative information provided by these qualifications into earnings forecasts and offer prices. Investors, however, appear to efficiently impound the negative implications of the audit qualifications into stock market prices within the first day of trading. We also detect a strong negative market reaction on and around June 10, 2004, when regulators disallowed IPOs with audit qualifications in compliance with European Union Directives. Sample firms with and without qualifications were equally penalized. This negative market sentiment confirms the wider market skepticism reflected in very low IPO activity in Greece in recent years. Overall, our results suggest that underwriters tend to align their interests with the interests of their clients, the old stockholders, at the expense of the new stockholders. They also suggest that the practice of reporting quantifiable qualifications in audit reports is valuable to investors. Although the management may choose not to recognize qualified amounts, investors price these amounts given that they are disclosed by an expert.

Keywords: Audit Qualifications, Valuation, IPOs, Underwriters, Earnings Forecasts

JEL Classification: M41

Suggested Citation

Ghicas (Gikas), Dimitrios C. and Papadaki, Aphroditi J. and Sougiannis, Theodore and Siougle, Georgia, The Relevance of Quantifiable Audit Qualifications in the Valuation of Ipos (April 2006). Available at SSRN: https://ssrn.com/abstract=908685 or http://dx.doi.org/10.2139/ssrn.908685

Dimitrios C. Ghicas (Gikas)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Aphroditi J. Papadaki

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Theodore Sougiannis (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0555 (Phone)
217-244-0902 (Fax)

Georgia Siougle

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

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