AN EMPIRICAL EXAMINATION OF THE IMPACT OF LIMITED REVIEW ON EQUITY PRICES

SEC Accounting Series Release No. 177 required independent auditors to make a limited review of summarized quarterly data included in annual reports. This paper examines the reaction of investors to earnings announcements based on financial statements subject to limited review relative to announcements when no auditor involvement was required. The reaction of market participants is measured by an abnormal daily return metric of the common stock surrounding the published earnings announcement in The Wall Street Journal. As hypothesized, no difference in investor reaction is observed for the sample of firms subject to limited review for the 1977 fiscal year, but exempt in the 1976 fiscal year.