The Effect of Audit Quality on Idiosyncratic Return Volatility

Chen, Yangyang and Sadique, Shibley and Srinidhi, Bin and Veeraraghavan, Madhu (2013) The Effect of Audit Quality on Idiosyncratic Return Volatility. TAPMI, Manipal.

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In this paper, we find that high quality audits have the effect of concentrating firm-specific information and investors’ price response to the information during financial statement release periods and diluting them at other periods. As a result, we find that firms audited by higher quality auditors exhibit lower idiosyncratic return volatility. Our findings are based on a sample of 51,559 firm-year observations for 8,261 U.S. firms spanning the period from 2000 to 2010. In further analysis, we show that the effect of audit quality on idiosyncratic return volatility is incremental to the effect of accruals quality. Our findings are robust to alternative measures of audit quality and idiosyncratic return volatility, as well as to endogeneity issues. Taken together, our findings suggest that audit quality is valued by investors and used in their pricing decisions.

Item Type: TAPMI Working Papers
Uncontrolled Keywords: Idiosyncratic Return Volatility; Information Asymmetry; Audit Quality
Subjects: Finance
Finance > Accounting
Divisions: Finance and Strategy
Depositing User: Ms. Vanitha K
Date Deposited: 14 Nov 2018 09:17
Last Modified: 14 Nov 2018 09:17

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