SUMMARY This study presents a review of academic research on audit quality. We begin with a review of existing definitions of audit quality and describe general frameworks for establishing audit quality. Next, we summarize research on indicators of audit quality such as inputs, process, and outcomes. Finally, we offer some suggestions for future research. The study should be useful to academics interested in audit quality as well as to the Public Company Accounting Oversight Board (PCAOB) and other regulators.

SYNOPSIS We examine whether firms resort to real earnings management when their ability to manage accruals is constrained by higher quality auditors. In settings involving strong upward earnings management incentives, i.e., for firms that meet or just beat earnings benchmarks and firms that issue seasoned equities, we find that city-level auditor industry expertise and audit fees are associated with higher levels of real earnings management. We find similar, albeit weaker, results for the Big N auditors. Our paper suggests an unintended consequence of higher quality auditors constraining accrual earnings management, namely, firms resorting to potentially even more costly real earnings management. We also find that longer auditor tenure is associated with greater real earnings management, which could suggest merits of mandating audit firm rotation. JEL Classifications: M40; M41.

We study the relation between asset liquidity and stock liquidity. Our model shows that the relation may be either positive or negative depending on parameter values. Asset liquidity improves stock liquidity more for firms that are less likely to reinvest their liquid assets (i.e., firms with less growth opportunities and financially constrained firms). Empirically, we find a positive and economically large relation between asset liquidity and stock liquidity. Consistent with our model, the relation is more positive for firms that are less likely to reinvest their liquid assets. Our results also shed light on the value of holding liquid assets.