IDEAS home Printed from https://ideas.repec.org/a/bla/joares/v59y2021i5p1741-1782.html
   My bibliography  Save this article

Do Investors Care Who Did the Audit? Evidence from Form AP

Author

Listed:
  • MARCUS M. DOXEY
  • JAMES G. LAWSON
  • THOMAS J. LOPEZ
  • QUINN T. SWANQUIST

Abstract

In early 2017, the Public Company Accounting Oversight Board (PCAOB) mandated the disclosure of audit participants, including the lead audit partner and other audit firms participating in the audit (“component auditors”). In this study, we examine whether investors use these disclosures in a way that influences their investment decisions, a primary goal of the PCAOB. Using trading volume, absolute abnormal returns, and bid–ask spreads, we find little evidence of a significant investor response following the disclosure of partner identity or component auditor participation in the first three years of the requirement. We also examine instances where these disclosures are most likely to be informative (e.g., partners associated with restatements or component auditors with PCAOB deficiencies) and find no significant investor response. Taken together, we find little evidence that capital markets respond to partner and component auditor identity in the United States.

Suggested Citation

  • Marcus M. Doxey & James G. Lawson & Thomas J. Lopez & Quinn T. Swanquist, 2021. "Do Investors Care Who Did the Audit? Evidence from Form AP," Journal of Accounting Research, Wiley Blackwell, vol. 59(5), pages 1741-1782, December.
    • Handle: RePEc:bla:joares:v:59:y:2021:i:5:p:1741-1782
    DOI: 10.1111/1475-679X.12392
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1475-679X.12392
    Download Restriction: no
    File URL: https://libkey.io/10.1111/1475-679X.12392?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Drake, Michael S. & Roulstone, Darren T. & Thornock, Jacob R., 2016. "The usefulness of historical accounting reports," Journal of Accounting and Economics, Elsevier, vol. 61(2), pages 448-464.
    2. Michael S. Drake & Darren T. Roulstone & Jacob R. Thornock, 2015. "The Determinants and Consequences of Information Acquisition via EDGAR," Contemporary Accounting Research, John Wiley & Sons, vol. 32(3), pages 1128-1161, September.
    3. Aobdia, Daniel, 2019. "Do practitioner assessments agree with academic proxies for audit quality? Evidence from PCAOB and internal inspections," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 144-174.
    4. Morse, D, 1981. "Price And Trading Volume Reaction Surrounding Earnings Announcements - A Closer Examination," Journal of Accounting Research, Wiley Blackwell, vol. 19(2), pages 374-383.
    5. DeFond, Mark & Hung, Mingyi & Trezevant, Robert, 2007. "Investor protection and the information content of annual earnings announcements: International evidence," Journal of Accounting and Economics, Elsevier, vol. 43(1), pages 37-67, March.
    6. Lo, Andrew W & Wang, Jiang, 2000. "Trading Volume: Definitions, Data Analysis, and Implications of Portfolio Theory," The Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 257-300.
    7. Beaver, Wh, 1968. "Information Content Of Annual Earnings Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 6, pages 67-92.
    8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    9. Landsman, Wayne R. & Maydew, Edward L. & Thornock, Jacob R., 2012. "The information content of annual earnings announcements and mandatory adoption of IFRS," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 34-54.
    10. John Goodwin & Donghui Wu, 2016. "What is the Relationship Between Audit Partner Busyness and Audit Quality?," Contemporary Accounting Research, John Wiley & Sons, vol. 33(1), pages 341-377, March.
    11. Clive Lennox & Bing Li, 2020. "When Are Audit Firms Sued for Financial Reporting Failures and What Are the Lawsuit Outcomes?," Contemporary Accounting Research, John Wiley & Sons, vol. 37(3), pages 1370-1399, September.
    12. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    13. Donovan, John & Frankel, Richard & Lee, Joshua & Martin, Xiumin & Seo, Hojun, 2014. "Issues raised by studying DeFond and Zhang: What should audit researchers do?," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 327-338.
    14. C. Edward Fee & Charles J. Hadlock & Joshua R. Pierce, 2013. "Managers with and without Style: Evidence Using Exogenous Variation," The Review of Financial Studies, Society for Financial Studies, vol. 26(3), pages 567-601.
    15. Craig W. Holden & Stacey Jacobsen, 2014. "Liquidity Measurement Problems in Fast, Competitive Markets: Expensive and Cheap Solutions," Journal of Finance, American Finance Association, vol. 69(4), pages 1747-1785, August.
    16. Linda A. Myers & Jonathan E. Shipman & Quinn T. Swanquist & Robert L. Whited, 2018. "Measuring the market response to going concern modifications: the importance of disclosure timing," Review of Accounting Studies, Springer, vol. 23(4), pages 1512-1542, December.
    17. Mikko Zerni, 2012. "Audit Partner Specialization and Audit Fees: Some Evidence from Sweden," Contemporary Accounting Research, John Wiley & Sons, vol. 29(1), pages 312-340, March.
    18. W. Robert Knechel & Ann Vanstraelen & Mikko Zerni, 2015. "Does the Identity of Engagement Partners Matter? An Analysis of Audit Partner Reporting Decisions," Contemporary Accounting Research, John Wiley & Sons, vol. 32(4), pages 1443-1478, December.
    19. Chung, Kee H. & Zhang, Hao, 2014. "A simple approximation of intraday spreads using daily data," Journal of Financial Markets, Elsevier, vol. 17(C), pages 94-120.
    20. Jenna J. Burke & Rani Hoitash & Udi Hoitash, 2020. "The Use and Characteristics of Foreign Component Auditors in U.S. Multinational Audits: Insights from Form AP Disclosures," Contemporary Accounting Research, John Wiley & Sons, vol. 37(4), pages 2398-2437, December.
    21. Lamoreaux, Phillip T., 2016. "Does PCAOB inspection access improve audit quality? An examination of foreign firms listed in the United States," Journal of Accounting and Economics, Elsevier, vol. 61(2), pages 313-337.
    22. Farshid Abdi & Angelo Ranaldo, 2017. "A Simple Estimation of Bid-Ask Spreads from Daily Close, High, and Low Prices," The Review of Financial Studies, Society for Financial Studies, vol. 30(12), pages 4437-4480.
    23. Fung, Simon Yu Kit & Raman, K.K. & Zhu, Xindong (Kevin), 2017. "Does the PCAOB international inspection program improve audit quality for non-US-listed foreign clients?," Journal of Accounting and Economics, Elsevier, vol. 64(1), pages 15-36.
    24. Wuchun Chi & Linda A. Myers & Thomas C. Omer & Hong Xie, 2017. "The effects of audit partner pre-client and client-specific experience on audit quality and on perceptions of audit quality," Review of Accounting Studies, Springer, vol. 22(1), pages 361-391, March.
    25. Andersen, Torben G, 1996. "Return Volatility and Trading Volume: An Information Flow Interpretation of Stochastic Volatility," Journal of Finance, American Finance Association, vol. 51(1), pages 169-204, March.
    26. Linda Smith Bamber & Orie E. Barron & Douglas E. Stevens, 2011. "Trading Volume Around Earnings Announcements and Other Financial Reports: Theory, Research Design, Empirical Evidence, and Directions for Future Research," Contemporary Accounting Research, John Wiley & Sons, vol. 28(2), pages 431-471, June.
    27. Keith Czerney & Jaime J. Schmidt & Anne M. Thompson, 2019. "Do Investors Respond to Explanatory Language Included in Unqualified Audit Reports?," Contemporary Accounting Research, John Wiley & Sons, vol. 36(1), pages 198-229, March.
    28. Elizabeth Gutierrez & Miguel Minutti-Meza & Kay W. Tatum & Maria Vulcheva, 2018. "Consequences of adopting an expanded auditor’s report in the United Kingdom," Review of Accounting Studies, Springer, vol. 23(4), pages 1543-1587, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Christensen, Brant & Lei, Lijun (Gillian) & Shu, Sydney Qing & Thomas, Wayne, 2023. "Does audit regulation improve the underlying information used by managers? Evidence from PCAOB inspection access and management forecast accuracy," Accounting, Organizations and Society, Elsevier, vol. 106(C).
    2. Bingyi Chen & Jenelle K. Conaway, 2022. "Do U.S. Investors Value Foreign Component Auditors?," Journal of Accounting Research, Wiley Blackwell, vol. 60(3), pages 805-851, June.
    3. Yi-Hsing Liao & Hua Lee & Chao-Jung Chen, 2023. "The informational role of audit partner industry specialization," Review of Quantitative Finance and Accounting, Springer, vol. 60(1), pages 69-109, January.
    4. Abbott, Lawrence J. & Buslepp, William L., 2022. "An investigation of the market's pricing of auditor competence: Evidence from PwC's Oscars blunder," Accounting, Organizations and Society, Elsevier, vol. 98(C).
    5. Elsayed, Mohamed & Elshandidy, Tamer & Ahmed, Yousry, 2022. "Corporate failure in the UK: An examination of corporate governance reforms," International Review of Financial Analysis, Elsevier, vol. 82(C).
    6. Kose John & Min (Shirley) Liu, 2021. "Does the Disclosure of an Audit Engagement Partner’s Name Improve the Audit Quality? A Difference-in-Difference Analysis," JRFM, MDPI, vol. 14(11), pages 1-30, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    2. Devos, Erik & Hao, Wei & Prevost, Andrew K. & Wongchoti, Udomsak, 2015. "Stock return synchronicity and the market response to analyst recommendation revisions," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 376-389.
    3. Kajüter, Peter & Klassmann, Florian & Nienhaus, Martin, 2016. "Do Reviews by External Auditors Improve the Information Content of Interim Financial Statements?," The International Journal of Accounting, Elsevier, vol. 51(1), pages 23-50.
    4. Fargher, Neil & Wee, Marvin, 2019. "The impact of Ball and Brown (1968) on generations of research," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 55-72.
    5. Robert Stoumbos, 2023. "The Growth of Information Asymmetry Between Earnings Announcements and Its Implications for Reporting Frequency," Management Science, INFORMS, vol. 69(3), pages 1901-1928, March.
    6. Wei Hao & Udomsak Wongchoti & Martin Young & Jianguo Chen, 2021. "R2 and the corporate signaling effect," International Review of Finance, International Review of Finance Ltd., vol. 21(4), pages 1353-1381, December.
    7. Kyungha Kari Lee & Carolyn B. Levine, 2020. "Audit partner identification and audit quality," Review of Accounting Studies, Springer, vol. 25(2), pages 778-809, June.
    8. Kris Hardies & Sarowar Hossain & Larelle (Ellie) Chapple, 2021. "Archival research on audit partners: assessing the research field and recommendations for future research," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4209-4256, September.
    9. Pevzner, Mikhail & Xie, Fei & Xin, Xiangang, 2015. "When firms talk, do investors listen? The role of trust in stock market reactions to corporate earnings announcements," Journal of Financial Economics, Elsevier, vol. 117(1), pages 190-223.
    10. Rajat Deb & Mukesh Nepal & Sourav Chakraborty, 2023. "IFRS and Audit Quality: A Systematic Literature Review," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 48(1), pages 118-138, February.
    11. Olibe, Kingsley O., 2016. "Security Returns and Volume Responses Around International Financial Reporting Standards (IFRS) Earnings Announcements," The International Journal of Accounting, Elsevier, vol. 51(2), pages 240-265.
    12. Melvin Jameson & Tao‐Hsien Dolly King & Andrew Prevost, 2021. "Top management incentives and financial flexibility: The case of make‐whole call provisions," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(1-2), pages 374-404, January.
    13. Li, Valerie & Luo, Yan, 2023. "Costs and benefits of auditors' disclosure of critical audit matters: Initial evidence from the United States," Advances in accounting, Elsevier, vol. 60(C).
    14. Edward A. E. Jones & Anthony K. Kyiu & Hao Li, 2021. "Earnings informativeness and trading frequency: Evidence from African markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1064-1086, January.
    15. Pham, Linh & Hao, Wei & Truong, Ha & Trinh, Hai Hong, 2023. "The impact of climate policy on U.S. environmentally friendly firms: A firm-level examination of stock return, volatility, volume, and connectedness," Energy Economics, Elsevier, vol. 119(C).
    16. Wijayana, Singgih & Gray, Sidney J., 2018. "Capital market consequences of cultural influences on earnings: The case of cross-listed firms in the U.S. stock market," International Review of Financial Analysis, Elsevier, vol. 57(C), pages 134-147.
    17. Elizabeth Gutierrez & Miguel Minutti-Meza & Kay W. Tatum & Maria Vulcheva, 2018. "Consequences of adopting an expanded auditor’s report in the United Kingdom," Review of Accounting Studies, Springer, vol. 23(4), pages 1543-1587, December.
    18. Theodore E. Christensen & Hang Pei & Spencer R. Pierce & Liang Tan, 2019. "Non-GAAP reporting following debt covenant violations," Review of Accounting Studies, Springer, vol. 24(2), pages 629-664, June.
    19. Michael J. Fleming & Eli M. Remolona, 1997. "What moves the bond market?," Economic Policy Review, Federal Reserve Bank of New York, vol. 3(Dec), pages 31-50.
    20. Choi, Jong-Seo & Choe, Chongwoo, 1998. "Explanatory factors for trading volume responses to annual earnings announcements: Evidence from the Korean stock market," Pacific-Basin Finance Journal, Elsevier, vol. 6(1-2), pages 193-212, May.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:joares:v:59:y:2021:i:5:p:1741-1782. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0021-8456 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.