Evidence on Risk Changes Around Audit Qualification and Qualification Withdrawal Announcements

Qualifications to an audit report may provide the basis for an auditor's claim that the user was warned about an unusual risk. If audit qualifications highlight changes in firm risk that are material, then the announcement of a qualification should be associated with an increase in the risk of the affected firm. In this paper, we test this proposition. Our initial tests do not detect a shift in systematic risk around qualification announcements; however, subsequent analysis shows that firms announcing recurring material uncertainties have higher levels of systematic risk than firms announcing initial qualifications. Furthermore, we document a significant decrease in systematic risk for firms publicly announcing qualification withdrawals. These results are consistent with announcements of qualification withdrawals providing more timely information to capital market participants than announcements of qualification issuances, which are more likely to have been pre-empted by alternative sources of information. Our findings also indicate that unsystematic, or firm-specific, risk changes significantly around qualification and withdrawal announcement dates. Although systematic risk is of primary importance to investors, information regarding company-specific risk may assist other outside users (i.e., lenders, regulators, employees, rating agencies, etc.) in evaluating a given firm's ability to satisfy its existing contracts. In total, this paper provides evidence that may be useful to many external parties regarding the association between the material uncertainties that are highlighted in audit reports and changes in firm risk.     

事务所规模、审计行业专长与知情交易概率

外部审计的作用在于提高公司的信息披露透明度,减少信息不对称,以保护投资者利益。本文从知情交易概率视角出发,研究了外部审计在减少信息不对称方面所发挥的作用。研究结果发现,国内"十大"审计的公司,以及由具有审计行业专长的事务所审计的公司,知情交易概率更低,而且行业专长的国内十大(非十大)审计的公司的知情交易概率也低于不具有行业专长的国内十大(非十大)。进一步检验还表明,在机构投资者持股的公司中,事务所规模和审计行业专长能够更有效减少知情交易概率。     

Information asymmetry,leverage and firm value: Do crisis and growth matter?

Drawing on pecking order and agency cost theories, we assess the extent to which information asymmetry is an important determinant of firm value and the extent to which this relationship is conditional on the leverage level of firms. We also assess the impact of information asymmetry on firm value during the pre and post 2007/09 financial crisis period and for high and low growth opportunity firms. Using a large sample of UK firms, our empirical findings suggest that information asymmetry adversely impacts firm value, and that this effect decreases with firm's leverage. We also find that leverage has a negative effect on firm value, and that the marginal effect of leverage is lower for information asymmetric firms. Further, we find that the relation between information asymmetry and firm value is more pronounced in the post-crisis period than the pre-crisis period. Finally, we show that the impact of information asymmetry on firm value is higher (lower) for firms with high (low) growth opportunities.     

Corporate governance and the stock market reaction to new product announcements

This study examines the explanatory power of corporate governance mechanisms on the wealth effect of firms?? new product strategies. We show that board size, board independence, audit committee independence, CEO equity-based pay, analyst following and shareholder rights are all of significance in explaining the variations in the wealth effect of new product introductions. Our results reveal that the new product strategies announced by firms with better corporate governance mechanisms tend to receive higher stock market valuations than those of firms with poorer governance mechanisms. This study provides empirical support for the notion that enhanced governance mechanisms can reduce both agency and information asymmetry problems for firms announcing new products.     

Shareholdings by Financial Institutions, Information Asymmetry and the Intertemporal Return-Earnings Relation in Japan

Using a large sample of Japanese firms, we examine informational effects of the joint ownership of debt and equity by financial institutions. In particular, we argue that shareholdings by financial institutions are associated with increased monitoring and reduced information asymmetry. Our results support the hypothesis that stock prices incorporate information about future earnings earlier for firms with higher equity ownership by financial institutions. In a nutshell, shareholdings by financial institutions appear to be an important institutional factor in Japan to alleviate information asymmetry, thereby serving as a substitute for the market-based monitoring.     

Do independent directors cause improvements in firm transparency?

Although recent research documents a positive relation between corporate transparency and the proportion of independent directors, the direction of causality is unclear. We examine a regulatory shock that substantially increased board independence for some firms, and find that information asymmetry, and to some extent management disclosure and financial intermediation, changed at firms affected by this shock. We also examine whether these effects vary as a function of management entrenchment, information processing costs, and required changes to audit committee independence. Our results suggest that firms can alter their corporate transparency to suit the informational demands of a particular board structure.     

R&D Intensity and Corporate Financial Policy: Some International Evidence

This paper presents evidence on the financial policies of firms strongly engaged in research and development activities. By referring to the under-investment paradox, the asset substitution problem, the asset specificity proposition and the information asymmetry literature, we postulate that R&D-intensive firms should adopt specific financial policies. In conformity with our hypotheses, empirical results based on a sample of R&D-intensive and non-R&D firms in four major industrialized countries (Europe, the UK, Japan and the US) show that R&D-intensive firms exhibit significant lower debt and dividend payment levels, but shorter debt maturities and higher cash levels than non-R&D ones.     

Do political connections affect the role of independent audit committees and CEO Duality? Some evidence from Malaysian audit pricing

This study examines whether political connection to firms affects the association between audit committee independence and demand for higher quality audits. In line with Carcello et al. (2002), our findings show that there is a positive association between audit committee independence and audit fees thus supporting the hypothesis that more independent audit committees demand higher audit quality. However, we find that this relationship is weaker for politically connected (PCON) firms suggesting that the independence of audit committees in Malaysian PCON firms may be compromised. Additionally, we provide evidence that PCON firms that have CEO duality are perceived by audit firms as being of higher risk than CEO duality firms without political connection.     

Dual-class versus single-class firms: information asymmetry

I examine information asymmetry in dual-class firms in general and when they need (do not need) additional external capital. In general the results show that dual-class firms have higher information asymmetry than single-class firms. When dual-class firms need additional external financing, the gap in information asymmetry between dual-class firms and single class firms is narrower. I find that as the need of additional external capital increases, the difference in information asymmetry between dual-class and single-class firms decreases (consistent with increased disclosures). It decreases, up to a point that there is no difference in information asymmetry with single-class firms that also needs additional external capital. When using adverse selection component of bid-ask spread, the paper finds that as the need of external financing gets high, dual-class firms show lower information asymmetry 1 year before they need additional external capital.     

Does Information Asymmetry Explain The Diversification Discount?

We examine the diversification discount while controlling for differences in information asymmetry between diversified and nondiversified firms. We show that both diversified and nondiversified firms with higher levels of information asymmetry have discounted firm values relative to firms with lower levels of information asymmetry, although a diversification discount remains at all levels of information asymmetry. Fixed‐effect Fama‐MacBeth regressions confirm the existence of a statistically significant relation between information asymmetry proxies and excess value, but they also show that a significant diversification discount remains after controlling for differences in information asymmetry and other firm characteristics discussed in earlier studies (e.g., size, profitability, leverage, and capital constraint).     

Information demand density matters: Evidence from the post-earnings announcement drift

We show that information demand density (IDD), proxied by abnormal online search volume divided by the magnitude of information asymmetry, has material impacts on price efficiency. First, IDD reduces the post-earnings announcement drift (PEAD) by improving the informational efficiency. Second, IDD is higher for nonlocal investors, which could also reduce the magnitude of PEAD. Third, the impact of IDD is more pronounced for the non-SOEs firms, firms with stronger information environment, higher media coverage, and headquartered in big cities. These results are robust to alternative measurements of IDD and regression windows.     

Audit Committee and CEO Ethnicity and Audit fees: Some Malaysian evidence

This study extends the literature on audit pricing by examining the relationship between ethnicity (bumiputra vs non-bumiputra), corporate governance attributes, and audit fees using data from 559 publicly-listed companies in Malaysia in 2005. Drawing from theories of ethnicity and political economy, we discuss our two hypotheses that predict positive associations between audit fees and (1) the proportion of bumiputra members on audit committees, and (2) the presence of a bumiputra CEO. The results support the hypothesis that firms with bumiputra CEOs incur higher audit fees, but we do not find an association for firms with bumiputra-dominant audit committees. In additional analysis, we find that the audit premium paid by firms with a bumiputra CEO is higher for the smaller client firms. Further, we find that firms managed by a bumiputra CEO with a fully bumiputra-composed audit committee tend to pay higher audit fees than the other firms, indicating that there is a combined ethnicity effect on audit fees.     

Advertising investments,information asymmetry,and insider gains

Extant research has documented various sources of informational advantages enjoyed by company insiders including firm size, analyst following, dividend payout policy, book-to-market ratio, and the presence or absence of R&D investments. Surprisingly, despite this large body of work, virtually no research has investigated the contribution of advertising investments to information asymmetry. This omission is particularly glaring since: (a) advertising investments constitute a significant fraction of many firms' ongoing expenditures, and (b) the received literature provides strong theoretical arguments relating advertising investments and information asymmetry. Accordingly, the primary objective in this study is to empirically address this gap. Using advertising and insider transaction data at over 12,000 firms from 1986 to 2011, we find that insider gains are significantly greater at firms characterized by advertising investments. Specifically, a zero cost portfolio that is long on firms with net insider purchases and advertising investments, and short on firms with net insider purchases and devoid of advertising investments, garners annual abnormal returns of 5.5%. In addition, we find that investors' reaction to news of insider purchasing is significantly more pronounced at firms characterized by advertising investments — investors rationally recognize the greater information content associated with insider purchases at these firms.     

Do Banks Value Innovation? Evidence from US Firms

This study evaluates how innovation within companies alleviates the information asymmetry problems in relationship lending. We hypothesize that patenting activities could reveal favorable private information and, hence, reduce the information asymmetry between innovative borrowers and banks. Using a sample of US patenting firms from 1987 to 2004, we show that borrowers with higher innovation capability (revealed by having more patent applications, higher research & development (R&D) productivity, or higher‐quality patents) enjoy lower bank‐loan spreads and better nonprice‐related loan terms. Our evidence further suggests that the information benefits of patenting activities on loan spreads is more pronounced for small or less R&D‐intensive firms.     

Do voluntary corporate restrictions on insider trading eliminate informed insider trading?

We investigate whether voluntary corporate restrictions on insider trading effectively prevent insiders from exploiting their private information. Our results show that insiders of firms with seeming restrictions on insider trading continue to take advantage of positive private information while being more cautious when exploiting negative private information. The results suggest that insiders continue to exploit their informational advantages in a way that minimizes their legal risk. We also find that the degree of information asymmetry is significantly lower in firms with restriction policies and that corporate governance significantly affects firms' decisions to adopt these policies.     

Effects of audit committee chair characteristics on auditor choice,audit fee and audit quality

We investigate whether the characteristics of audit committee (AC) chairs are associated with decisions about auditor choice, audit fees and audit quality. Using hand-collected Australian data, firms with AC chairs who have longer tenure and multiple AC memberships across several boards are found to be more likely to choose Big 4 and/or industry specialist auditors, pay higher audit fees and have lower discretionary accruals. Those AC chairs with higher business qualifications are more likely to hire a Big 4 auditor, pay higher audit fees and have lower discretionary accruals, while AC chairs with professional qualifications are more likely to hire a Big 4 and/or industry specialist auditor. In contrast, firms with AC chairs who are executive directors are less likely to hire a Big 4 auditor and have higher discretionary accruals. Our findings contribute to the literature by documenting that various characteristics of AC chairs are important for enhancement of auditor selection and audit quality.     

Audit Firm Attributes and Auditor Litigation Risk

This study examines the association between auditors' litigation risk and audit firm attributes. Using professional liability insurance premiums as a proxy for auditors' litigation risk, we present evidence that the risk is lower in audit firms having: (1) separate non-audit and audit divisions; (2) a higher proportion of partners; and (3) a higher annual growth in number of CPAs employed. Additionally, we find that the risk is higher in audit firms having: (1) operating losses; and (2) high revenue growth. Our results are consistent with the idea that audit firms' financial condition and organizational structure affect their independence/ expertise, and, in turn, their litigation risk. Our results are broadly supportive of the PCAOB's (2015) and US Department of Treasury's (2008) views that investors, audit committees, management, and other regulators could benefit from having access to financial and organizational information about audit firms.     

Auditor choice and information asymmetry: evidence from international syndicated loans

Analyzing a large sample of non-US public firms from 31 countries that obtain private loans, we find that loan syndicates that lend to borrowers that employ Big N auditors are larger and less concentrated and that the lead arrangers and largest investors of these syndicates are able to hold a lower proportion of the loan after issuance. Further analysis demonstrates that this effect exists only in countries with strong creditor rights and in those countries with high levels of societal trust, suggesting that both sound formal and informal institutional factors are prerequisites for lenders and borrowers to benefit from differential audit quality on loan syndicate structure efficiency. Furthermore, we find that the loan syndicate structure benefits for borrowers that employ Big N auditors are higher for borrowers with greater information asymmetry problems, but we do not find that Big N audits are able to address the information asymmetry and moral hazard issues between the lenders themselves.     

Bank loans for private and public firms in a liquidity crunch

Bank reliance on short-term funding has increased over time. While an effective source of financing in good times, the 2007 financial crisis has exposed the vulnerability of banks and ultimately firms to such a liability structure. We show that banks dependent on wholesale funding contracted their lending the greatest during the crisis. Our results suggest, however, that in the financial crisis vulnerable banks passed the liquidity shock only to public firms and not to private firms. Loans to private firms were affected through a different channel, largely through higher retained shares by lead arrangers. Consistent with standard models of financial intermediation with information asymmetry, vulnerable banks increased their monitoring of informationally opaque firms for which the potential for informational rents is the highest.