Auditor Quality and the Role of Accounting Information in Explaining UK Stock Returns
AbstractIn this paper, we examine the relative importance of the cash flow and accruals components of earnings in explaining the variation in UK company equity returns, together with the extent to which these relationships vary by auditor quality. We use a multivariate time-series approach that can be reconciled to a log-linear theoretical valuation model and, unlike the standard linear regression of returns on earnings components, accommodates time varying discount rates. Based on a decomposition of the variance of equity returns, cash flows and accruals, our results indicate that both cash flow news and accruals news are important drivers of equity returns, though cash flows are more influential than accruals. We also find that auditor quality moderates these relationships, since variation in both earnings components has a more significant effect for clients of large auditors. Finally, our results indicate that the impact of auditor quality is highest for the accruals component of earnings.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2009/9.
Length: 34 pages
Date of creation: Aug 2009
Date of revision: Oct 2011
Contact details of provider:
Postal: Aberconway Building, Colum Drive, CARDIFF, CF10 3EU
Phone: +44 (0) 29 20874417
Fax: +44 (0) 29 20874419
Web page: http://business.cardiff.ac.uk/research/academic-sections/economics/working-papers
More information through EDIRC
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Campbell, John Y, 1991.
"A Variance Decomposition for Stock Returns,"
Royal Economic Society, vol. 101(405), pages 157-79, March.
- Wong, Woon K, 2008. "A Unique Orthogonal Variance Decomposition," Cardiff Economics Working Papers E2008/10, Cardiff University, Cardiff Business School, Economics Section.
- Jeffrey L. Callen & Dan Segal, 2004. "Do Accruals Drive Firm-Level Stock Returns? A Variance Decomposition Analysis," Journal of Accounting Research, Wiley Blackwell, vol. 42(3), pages 527-560, 06.
- Andreas Charitou & Colin Clubb & Andreas Andreou, 2001. "The Effect of Earnings Permanence, Growth, and Firm Size on the Usefulness of Cash Flows and Earnings in Explaining Security Returns: Empirical Evidence for the UK," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(5-6), pages 563-594.
- Tuomo Vuolteenaho, 2002. "What Drives Firm-Level Stock Returns?," Journal of Finance, American Finance Association, vol. 57(1), pages 233-264, 02.
- Kormendi, Roger & Lipe, Robert, 1987. "Earnings Innovations, Earnings Persistence, and Stock Returns," The Journal of Business, University of Chicago Press, vol. 60(3), pages 323-45, July.
- Jeffrey L. Callen & Ole-Kristian Hope & Dan Segal, 2005. "Domestic and Foreign Earnings, Stock Return Variability, and the Impact of Investor Sophistication," Journal of Accounting Research, Wiley Blackwell, vol. 43(3), pages 377-412, 06.
- Govindarajan, Vijayaraghavan, 1980. "The objectives of financial statements: An empirical study of the use of cash flow and earnings by security analysts," Accounting, Organizations and Society, Elsevier, vol. 5(4), pages 383-392, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bruce Webb).
If references are entirely missing, you can add them using this form.