IDEAS home Printed from
   My bibliography  Save this paper

Auditor Quality and the Role of Accounting Information in Explaining UK Stock Returns


  • Clatworthy, Mark A

    () (Cardiff Business School)

  • Pong, Christopher K.M.
  • Wong, Woon K.


In 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.

Suggested Citation

  • Clatworthy, Mark A & Pong, Christopher K.M. & Wong, Woon K., 2009. "Auditor Quality and the Role of Accounting Information in Explaining UK Stock Returns," Cardiff Economics Working Papers E2009/9, Cardiff University, Cardiff Business School, Economics Section, revised Oct 2011.
  • Handle: RePEc:cdf:wpaper:2009/9

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Kormendi, Roger & Lipe, Robert, 1987. "Earnings Innovations, Earnings Persistence, and Stock Returns," The Journal of Business, University of Chicago Press, vol. 60(3), pages 323-345, July.
    2. Tuomo Vuolteenaho, 2002. "What Drives Firm-Level Stock Returns?," Journal of Finance, American Finance Association, vol. 57(1), pages 233-264, February.
    3. repec:bla:joares:v:29:y:1991:i:1:p:19-36 is not listed on IDEAS
    4. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-179, March.
    5. Wong, Woon K, 2008. "A Unique Orthogonal Variance Decomposition," Cardiff Economics Working Papers E2008/10, Cardiff University, Cardiff Business School, Economics Section.
    6. 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.
    7. 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, June.
    8. repec:bla:joares:v:37:y:1999:i::p:53-87 is not listed on IDEAS
    9. 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.
    10. 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, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    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:cdf:wpaper:2009/9. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Yongdeng Xu). General contact details of provider: .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.